Journal of Service Science and Management, 2011, 4, 118-124
doi:10.4236/jssm.2011.42015 Published Online June 2011 (http://www.SciRP.org/journal/jssm)
Comparative Study on the Impacts of Institutional
and Individual Investor on Security Investment
Risk
Zunhuan Shen, Dong Cao
School of Economics and Management, Xidian University, Xi’an, China.
Received December 22nd, 2010; revised March 6th, 2011; accepted April 6th, 2011.
ABSTRACT
Institutional investor is supposed to be more powerful than individual investor from the perspectives of regularity au-
thority and scholar, but the results are mixed. Using the data of listed company in China, the paper presents a com-
parative study on the impacts of institu tional investor and individual investo r on investment risk. It shows that the scale
and ownership of institu tional investor have negative impacts on investment risk significantly , but the scale and owner-
ship of individual investor have positive impacts on investment risk, which implies institutional investor has the effects
to reduce investment risk compar ing with individual investor. Therefore, developing institutional investor and reducing
the scale of individual inventor is important for the stability of security market.
Keywords: Corporate Governance, Institutional Investor, Individual Investor, Informati on Disclosure, Investment Risk
1. Introduction
The separation of ownership and operation of corporation
results in the conflict of its prin cipal and a gent, and th ere
is lots of literature focusing on it [1]. However, with the
development of institutional investor, the ownership of
company both in USA and UK has the tendency of con-
centration [2]. And therefore, the conflict between man-
agers and shareholders is replaced by controlled share-
holder and minority shareholders [3].
As the deputy and trustee of individual investor, insti-
tutional investor has advantage of information. Scholars
regard that institutional inv estor is full of experience, has
the capacity of collecting information, analysis data, and
has critical influence on investment company [4]. Based
on the point, institutional investor has more information
than individual investor [5]. However, in literature, the
impacts of investor on investment risk are mixed. On one
hand, scholar regards the information included in the
price of stock could reduce the fluctuation of security
return ratio, so the more share held by institutional in-
vestor, the more information included in stock price [6],
and which is called in stitution al soph isticatio n hypothesis
[7]. On this point, it implies the ownership of institu-
tional investor is positive related with the fluctu ation and
investment risk. On the other hand, literature argues that
institutional inv estor is prudent [8], and the ownership of
institutional investors is negative related with the fluc-
tuation of stock price and investment risk, which is called
institutional preference hypothesis [7]. With the rapid
development of institutional investor in China, it is im-
portant to study the impacts of institutional investor on
investment risk, not only for the decision of investors and
security regularity commission, but also for the devel-
opment of security market.
The paper makes a comparative study on the impacts
of institutional and ind ividual investor on investment risk
based on the data of listed company in China during
2001-2008, and examines the institutional sophistication
hypothesis and institutional preference hypothesis. There
are three contributions of the paper in theory and practice.
Firstly, it checks two hypothesis set up by west scholar
using Chinese database. Secondly, it compares the im-
pacts of institutional investor with that of individual in-
vestor in China, which can help scholars to understand
the influence of institution al investor further. The last but
not the least, the paper also analysis the combined influ-
ences of institutional investor on disclosure and invest-
*Funds of Chinese Education Ministry (09XJA790008) and (72104888).

Comparative Study on the Impacts of Institutional and Individual Investor on Security Investment Risk 119
ment risk .
2. Literature Review and Hypothesis
Information about the invested company is asymmetric
between mangers and shareholders. Information asym-
metry may influence the information included in stock
price, and therefore has impacts on the pricing function
and investment risk.
Comparing with individual investor, institutional in-
vestor has two advantages in the respect of information.
On one hand, institutional investor has large scale and
professional knowledge, and has more power than indi-
vidual investor to collect information, analysis informa-
tion and make money [9,10]. Moreover, institutional in-
vestor may transfer the related information to other
shareholders and stakeholders, which influence invest-
ment further. On the other hand, on the base of high ratio
of share held, institutional investor has motives to take
part in corporate governance and improve the quality of
information disclosure. References [11,12] show that
Chinese institutional investor has played an important
role to improve the corporate governance and foreign
large institutional investor could improv e the information
disclosure and enhance the mobility of security market.
References [4,13] also regard that institutional investor
could monitor the information disclosure behavior effec-
tively based on their large capital and powerful capacity
to deal with information.
Limited literature concluded that institutional inves-
tor could improve information disclosure in China. Ref-
erence [14] shows that the share held by institutional
investor is positive related with the quality of informa-
tion disclosure, and scholar also indicts that the ratio of
share held and the scale of invested company of institu-
tional investor are positive related with the quality of
information disclosure [15]. According to literature, it is
reasonable to regard that institutional investor has more
power than individual investor to improve information
disclosure. As a consequence, we have the hypotheses as
follows:
Hypothesis H1: Comparing with individual investor,
institutional investor has more power to enhance infor-
mation disclosure, embodied as the ratio of share held
and the scale of institutional investor are positive related
with the quality of informatio n disclosure, but that of the
individual investor are not related with the quality of
information disclosure significantly.
Monitoring cost will exist if inve stors monitor manag-
ers of listed company. In this point, individual investors
have not strong incentive to care the behavior of manag-
ers. Contrary to this view, institutional investors have
large share of listed company, face serious press of their
principles and investment risk. Therefore, institutional
investors have strong incentive to monitor managers in
order to enhance information disclosure, improve the
performance and reduce the investment risk. However,
there are different points about the relation between the
ownership of institutional investor and the fluctuation of
stock price.
First, scholars regard that institutional investor en-
hance the fluctuation of stock price. Reference [16] has
the opinion for the west section. In Ch ina, literature sho w
that the fluctuation of share held by institution al investor
has significantly effects on the fluctuation of Shanghai
stock index, but that of the individual investor has not
these impacts [17]. Reference [18] also has the view.
Second, other literature regard that institutional investor
can not induce the fluctuation of stock price. Empirical
study shows that the existence of institutional investor at
least can not result in the instability of security market
[19], and scholar also finds evidence to support this point
that institutional investor has not play the function to
stabilize the security market [20]. Third, the existence of
institutional investor can reduce the fluctuation of stock
price. For instance, reference [21] finds that the higher
the share held ratio of institutional investors, the more
information included in stock price, which implies the
share held ratio of institutional investor is negative re-
lated with the fluctuation of stock price. Reference [10]
indicates that institutional investor can transfer the in-
formation related with the value of company to stake-
holders, which has the function to reduce the value of
information and investment risk. In China, some scholars
find that the ownership of institutional investor is nega-
tively related with the fluctuation of stock price [22].
Different from the three points above, the fourth view
regards that the relationship between the ownership of
institutional investor and the fluctuation of stock price is
decided by the dividend policy, and there are evidence to
support this consequence [7].
In general, the different points can be classified as two
main views. The first view emphasizes the institutional
preference hypothesis [7], which means the ownership of
institutional investor is negative related with the fluctua-
tion of stock price. The second view is the institutional
transaction hypothesis [7], which means the ownership of
institutional investor is positive related with the fluctua-
tion of stock price or investment risk. Different from the
west, the capital market in China is not maturity, and
whether the two hypothesizes are correct needed to be
test further. In addition, the more institutional investors
invest a company, the stronger incentives of them to
monitor the company’s managers, and therefore, the
higher quality of the information disclosure, the lower
fluctuation of stock price. According to these views, we

Comparative Study on the Impacts of Institutional and Individual Investor on Security Investment Risk 120
have the hypotheses as follows:
Hypothesis H2: Comparing with individual investor,
the ownership and the scale of institutional investor are
negative with the fluctuation of stock price or investment
risk, but that of the individual investor has not negative
impacts on the fluctuation of stock price or investment
risk significantly.
3. Methodology
3.1. Variables
In order to test the hypotheses, three types of variables
including explanatory variable, explained variable and
controlling variable are introduced. In the hypothesis H1,
the explained variable is DIS, the quality of information
disclosure, and the data of it is co ming from the database
of Shenzhen Stock Exchange, graded as high quality,
medium quality, low quality and failed quality. Refer-
ence [15] measures them as 1, 2, 3 and 4 respectively.
However, this measure method is not in line with their
meanings in general. In order to deal with the problem,
we measure them as 95, 85, 70 and 30 respectively. In
other words, we use their medium value to measure the
different level of information disclosure quality. In the
hypothesis H2, the explained variable is the fluctuation
of stock BETA. According to Efficient Market Hypothe-
sis, stock price not only includes public information, but
also includes private information of investors, listed
companies and government monitoring section. In this
view, the fluctuation of stock price reflects the extent of
information asymmetry between listed company and in-
vestors. The greater the fluctuation of stock price, the
higher the information asymmetry. Based on this point,
we use the system risk - BETA to measure the fluctuation
of stock price.
In the hypothesizes H1 and H2, the explanatory vari-
ables are the ownership of institutional investor IIS and
the scale of institutional investor NII, which is the total
share ratio held by institutional investors in the top 10
shareholders holding transactional share and the number
of institutional investor repetitively. In order to compare
its effects with individual investor, the explanatory vari-
ables also include individual investor’s ownership PIS
and its number NPI, wh ich is the total sh are ratio held b y
individual investors in the top 10 shareholders holding
transactional share and the number of individual inves-
tors repetitively. In this paper, the institutional investor
includes investment fund, investment bank, commercial
bank and trust company.
According to Principal and Agent Theory, corporate
governance not only influences the quality of information
disclosure and performance, but also has impacts on the
investment return of investors. In order to research the
impacts of institutional investor on investment risk on a
certain corporate governance level, the controlling vari-
able in the paper includes the scales of director in board,
independent director, board of monitoring, the ratio of
debt-asset and the concentration of ownership. All the
variables are listed in Table 1.
3.2. Samples
Although the history of capital market in China is not
more than 30 years, it develops fast. According to the
monthly statistics d ata on January 2011 of Ch inese Secu-
rity Regulatory Commission, there are 2063 listed com-
panies and 704 security investment funds at the end of
2010, which are available data source for scholars. The
sample in this paper is listed company in Shenzhen Stock
Exchange during 2001-2008, but not including financial
and special treated company. Finally, the sample includes
337, 293, 294, 309, 272, 278, 299 and 276 companies at
the year of 2001 to 2008 re spectively. All the data comes
from CCER DATABASE. Table 1 shows the da ta of the
samples.
Table 2 shows the characteristics of listed company in
China. For instance, the average quality of information
disclosure is 80.85, indicting that the information disclo-
sure is high, and the security regulation is efficient. The
average value of the system risk is 1.098, which implies
the average system risk is nearly equal to the stock ex-
change market as a whole. From the point of ownership,
in the top 10 large shareholders who held the transac-
tional share, there are 3.33 institutional investors on av-
erage, but the total share ratio of institutional investor is
only 3.9% for each company. Meanwhile, the average
ratio of share held by the top 5 large shareholder is
54.8% and that of the top 10 is 57.6%, which implies that
the ratio of share held by the sixth to tenth large share-
holders is 2.8%, lower than that of the institutional in-
vestor. According to this view, institutional investor
should play an important role in corporate governance.
4. Research Model and Discussion
4.1. Research Model
The hypotheses are tested by three steps. Firstly, we
study the impacts of the number and share ratio of both
the institutional and individual investor on the quality of
information disclosure to check the hypothesis H1. Sec-
ondly, we analysis the impacts of the quality o f informa-
tion disclosure on the investment risk. Finally, we re-
search the impacts of the numbered share ratio of both
the institutional and individual investor on investment
risk to test the hypothesis H2.
In literature, the level of corporate governance not
only influences the extent of the interest of investors, but
also influences the information disclosure and investment

Comparative Study on the Impacts of Institutional and Individual Investor on Security Investment Risk 121
Table 1. Variables and definition.
Items
Name of variables Sign Definition of Variable
Quality of information disclosure DIS High, medium, low and failed is measured by 95, 85, 70 and 30 repetitively
Fluctuation of stock price BETA System risk of stock
The scale of institutional investor NII The number of institutional investors in the top ten shareholders with transactional share
The ownership of institutional investor IIS The ownership of institutional investors in the top ten shareholders with transactional share
The scale of individual investor NPI The number of individual investors in the top ten shareholders with transactional share
The ownership of individual investor PIS The ownership of individual investors in the top ten shareholders with transactional share
The scale of listed company SCA The LOG10 of total asset
Debt-asset ratio RDA Total debt / equity of shareholder
The scale of board of director SBD The number of director in board
The scale of independent board SBID The number of independent director
The scale of monitoring board SBM The number of monitoring director
Ownership concentration CR5 The total share held by the top 5 largest shareholders
Table 2. Descriptive analysis of the sample.
Variable Minimum MaximumMean Std. Deviation
DIS 30.000 95.000 80.850 10.609
BETA 0.010 4.095 1.098 0.295
NII 0.000 10.000 3.330 3.615
IIS 0.000 0.648 0.039 0.062
NPI 0.000 10.000 4.880 3.676
PIS 0.000 0.000 0.010 0.014
SCA 8.085 11.000 9.28 0.428
RDA –16.515 273.718 1.376 5.963
SBD 0.000 17.000 6.850 2.169
SBID 0.000 8.000 2.820 1.305
SBM 0.000 6.000 1.150 0.790
CR5 0.129 1.277 0.548 0.143
CR10 0.145 1.339 0.576 0.138
risk. Therefore, in our model, we use the scales such as
the number of director in board, independent director,
monitoring board and the ownership concentration index
to reflect the level of corporate governance. Meanwhile,
in order to make out the impacts of investor of a certain
scale listed company, we also take the scale of company
as a variable in the models. In addition, in literature,
scholars take the ownership of investor, leverage, stock
return annual and information disclosure into account [7].
Therefore, we also use them as variables in the models.
Furthermore, in or der to make out the im pact s of i nvest ors
on information disclosure and investment risk under the
same condition, the models we used are similar with each
other. Under this consideration, in the paper, we use
Model (1) and (3) to study the impacts of institutional
investor, use the model (2) to check the impacts of infor-
mation disclosure on the investment risk, and use the (4)
and (5) to study t he impacts of individ ual i nv e st or.
012 345
6789
510
DISaa NIIaIISaSCAaRDAaSBD
aSBIDaSBMaCRaCR 
 
 (1)
01 234
5678
510
BETAc cDIScSCAcRDAcSBD
cSBIDcSBMcCRcCR 
 

(2)
012 345
6789
510
BETAbbNIIbIISbSCAbRDAbSBD
bSBID bSBMbCRbCR 
 
 (3)
012 34
567 8
9
5
10
DISddNPIdPISdSCAdRDA
dSBD dSBID dSBMdCR
dCR



 

(4)
012 34
567 8
9
5
10
BETAee NPIePISeSCAeRDA
eSBD eSBID eSBMeCR
eCR 


 

(5)
4.2. Outputs and Discussion
Using the SPSS 16.0 to deal with the data, we present the
results in Table 3 to Table5. We use the Enter Method,
so there is not collinearity in the model.
In Ta ble 3, the model (1) shows that the scale o f insti-
tutional investor has positive impacts on the quality of
information disclosure at the level of 1%, which supports
the hypothesis H1. Contrary to the result, the share ratio
held by institutional inv estor has negative impacts on the
quality of information disclosure at the level of 5%,
which does not support the hypothesis H1. As for the
reasons, in our opinion, both of the ratios of share held
by institutional investor and that of the sixth to the tenth
large shareholder are low, they have the inventiv e to col-
laborate with each other to protect their interest. The
higher the ratio of share held by institu tional investor, the
more probability they collaborate with each other, and as
a result, the more likelihood they harm the interest of
other small shareholders to benefit themselves. Conse-
quently, the share ratio of institutional investor has the
impacts to reduce the quality of information disclosure.
In fact, although institutional investor has the advantages
of information, it is only used for their own interest. For
example, in China, institutional investors disclosure th eir
portfolio at the end of each season, which implies the
information belongs to themselves and listed company.
From the data of Standard Coefficient at the table, the
effects of the scale of institutional investor is triangular
that of the ownership of institutional investor, which
means the number of institutional investor is more im-
portant than that of their ownership on information dis-

Comparative Study on the Impacts of Institutional and Individual Investor on Security Investment Risk 122
Table3 . The impacts of different investors on information disclosure.
Institutional investor (Model (1)) Individual investor (Model (4))
Unstandard Coefficient Standard CoefficientUnstandard Coefficient Standard Coefficient
B Std. Error Beta B Std. Error Beta
(Constant) 70.24*** (14.8) 4.739 74.86*** (15.53) 4.813
NII 0.616*** (7.23) 0.085 0.210
IIS –10.65* (–2.16) 4.935 –0.062
NPI –0.18** (–2.57) 0.071 –0.062
PIS –92.54*** (–4.99)18.558 –0.122
SCA 0.263 (0.527) 0.500 0.011 0.176 (0.35) 0.504 0.007
RDA 0.009 (0.254) 0.036 0.005 0.006 (0.16) 0.036 0.003
SBD 0.042 (0.42) 0.102 0.009 0.045 (0.45) 0.102 0.009
SBID 1.18*** (6.95) 0.170 0.145 1.133*** (6.5) 0.173 0.139
SBM 0.100 (0.37) 0.274 0.007 0.093 (0.34) 0.276 0.007
CR5 –1.768 (–0.23) 7.863 –0.024 –5.217 (–0.67) 7.834 –0.070
CR10 6.576 (0.81) 8.166 0.085 9.824 (1.2) 8.109 0.128
R = 0.25 Adjusted R2 = 0.059 F = 17.316*** R = 0.24 Adjusted R2 = 0.056 F = 16.484***
Table 4. The impacts of information disclosure on investment risk (Model(2)).
Unstandard Coefficient Standard Coefficient
B Std. Error B t Sig.
(Constant) 1.456 0.141 10.333 0.000
DIS –0.001 0.001 –0.045 –2.142 0.032
SCA –0.009 0.014 –0.014 –0.663 0.507
RDA 0.001 0.001 0.014 0.681 0.496
SBD –0.006 0.003 –0.046 –2.191 0.029
SBID 0.004 0.005 0.018 0.830 0.406
SBM –0.002 0.008 –0.006 –0.309 0.758
CR5 0.246 0.220 0.119 1.120 0.263
CR10 –0.469 0.228 –0.219 –2.055 0.040
R = 0.136 Adjusted R Square = 0.015 F = 5.554 (Significantly at the level of 1%)
Table 5. The impacts of different investors on investment risk.
Institutional investor (Model (3)) Individual investor (Model (5))
Unstandard Coefficient StandardCoefficient Unstandard Coefficient Standard Coefficient
B Std. Error Beta B Std. Error Beta
(Constant) 1.377*** (10.24) 0.134 1.374*** (10.01) 0.137
NII –0.008*** (–3.25) 0.002 –0.096
IIS –0.019** (–0.135) 0.140 –0.004
NPI 0.006*** (2.82) 0.002 0.070
PIS 0.214 (0.41) 0.526 0.010
SCA –0.012** (–0.83) 0.014 –0.017 –0.016 (–1.1) 0.014 –0.023
RDA 0.001*** (0.69) 0.001 0.014 0.001 (0.73) 0.001 0.015
SBD –0.006*** (–1.94) 0.003 –0.041 –0.006** (–2.1) 0.003 –0.045
SBID 0.005*** (0.95) 0.005 0.020 0.003 (0.61) 0.005 0.013
SBM 0.000*** (0.34) 0.008 0.000 0.000 (–0.12) 0.008 –0.003
CR5 0.077 (0.34) 0.225 0.037 0.159 (0.71) 0.224 0.077
CR10 –0.278 (–1.19) 0.233 –0.130 –0.372 (–1.61) 0.232 –0.174
R = 0.16 Adjusted R2 = 0.022 F = 6.89*** R = 0.15 Adjusted R2 = 0.019 F = 5.97***
closure.
In Table 3, the model (4) also shows that both the
number and the share ratio held by individual investor
have negative impacts on the quality of information dis-
closure at the level of 3% and 1% significantly respec-
tively, which suppo rt the hypo thesis H1.
Comparing with the outputs of model (1) and (4), the
ownership of institutional and individual investor has
negative impacts on the quality of information disclo sure.
Different with the impacts of the ownership, the scale of
institutional investor and individual investor have differ-
ent effects, which implies the number of institutional
investor has more important role to improve the quality
of information disclosure than that of the individual in-
vestor.
Table 4 shows that the quality of information disclo-
sure has negative impacts on investment risk at the level
of 5% significantly, in line with the literature [23-25]. In
other words, high quality information disclosure could
reduce the conflict of company and external investors,
agency cost and investment risk.
From the output of Model (3), it shows that the num-

Comparative Study on the Impacts of Institutional and Individual Investor on Security Investment Risk 123
ber of institutional investor has negative impacts on in-
vestment risk at the level of 1% significantly, and the
ownership of them has negative impacts on investment
risk at the level of 3% significantly, and both of them
support the hypothesis H2. From the model (5) in Table
5, it shows the ownership of individual investor has posi-
tive impacts on investment risk, which also supports the
hypothesis H2.
Combining the outputs of Table 3, Table 4 and Table
5, it shows that the number of institutional investor has
positive impacts on the quality of information disclo sure,
which has negative impacts on the investment risk fur-
ther significantly. As a result, in the Tab le 5, the number
of institutional investor has negative impacts on invest-
ment risk, supporting the institutional preference hy-
pothesis [7]. Different from the effects of institutional
investor, both the number and ownership of individual
investor has negative impacts on the quality of informa-
tion disclosure, and the quality of information disclosure
has negative impacts on investment risk. As a conse-
quence, the number of individual investor has positive
impacts on investment risk, which is in line with the
output on model (5).
The fact that the outputs in Table 3 and Tab le 4 are in
harmony with the outputs in Table 5 shows that the large
number of institutional investor has the impacts to reduce
the investment risk, but the large number of individual
investors has the effects to reduce the extent of monitor-
ing and information disclosure, and finally increase the
extent of investment risk. Hence, increasing the scale of
institutiona l investor and reducing the scale of ind ividual
inventor is important to minimize the investment risk and
stabilize the security market in China.
5. Conclusions
In order to steady the stock market and reduce the in-
vestment risk, institutional investor is becoming more
and more important around the world, especially in
China. Although there is lots of literature concerning on
the impacts of institutional investor, the results are mixed.
It is important to make an empirical study on the influ-
ence of institutional investor on the quality of informa-
tion disclosure and investment risk.
With the data of listed company in China, the paper
shows that both of the number and ownership of institu-
tional investor has negative impacts on investment risk,
which support the institutional preference hypothesis [7 ].
From the point of the number of institutional investor, it
has positive impacts on the quality of information dis-
closure and negative impacts on investment risk, which
implies institutional investor has the function to stabilize
the stock market. Contrary to this view, both of the
number and ownership of individual investor has nega-
tive impacts on the quality of information disclosu re sig-
nificantly, which implies that the individual investor has
the effect to enhance the investment risk. Therefore, en-
hancing the institutional investor and reducing the scale
and ownership of individual investor may improve the
information disclosure and reduce the investment risk in
China.
6. Acknowledgements
The paper is sponsored by Social Science and Humanity
Program of Chinese Education Ministry
（09XJA790008）
and supported by the Fundamental Research Funds for
the Central Universities (72104888). The author thanks
them sincerely. At the same time, the author also thanks
our colleagues at the School of Economics and Manage-
ment, Xidian University, for their constructive sugges-
tions.
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