Institutional Trading and Stock Returns: Evidence from China

Using a unique dataset containing daily institutional ownership information, we examine the relation between daily institutional trading and past, contemporaneous, and future stock returns on the Shanghai Stock Exchange (SSE). We find strong evidence of the price pressure effect induced by institutional trading, causing price impacts of up to 2.12% per day for the most intensively bought stocks. We further find that institutions are informed and momentum traders when buying but not when selling, which may be due to short-selling restrictions in China. Finally, our findings suggest that institutions engage in order splitting and/or herding behavior, as the price pressure effect is observed up to five days before and after the intense trading date.