Working Paper: NBER ID: w29453
Authors: Andy CW Chui; Avanidhar Subrahmanyam; Sheridan Titman
Abstract: Different share classes on the same firms provide a natural experiment to explore how investor clienteles affect momentum and short-term reversals. Domestic retail investors have a greater presence in Chinese A shares, and foreign institutions are relatively more prevalent in B shares. These differences result from currency conversion restrictions and mandated investment quotas. We find that only B shares exhibit momentum and earnings drift, and only A shares exhibit monthly reversals. Institutional ownership strengthens momentum in B shares. These patterns accord with a setting where momentum is caused by informed investors who underreact to fundamental signals, and short-term reversals represent premia to absorb the demands of noise traders. Overall, our findings confirm that clienteles matter in generating stock return predictability from past returns.
Keywords: momentum; reversals; investor clienteles; A shares; B shares
JEL Codes: G02; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Domestic retail investors (G23) | Short-term reversals (E32) |
| Noise trading in A shares (C58) | Greater volatility (E32) |
| Noise trading in A shares (C58) | Short-term reversals (E32) |
| Informed investors in B shares (G24) | Momentum (C69) |
| Higher institutional ownership in B shares (G32) | Underreaction to fundamental signals (G41) |
| Underreaction to fundamental signals (G41) | Post-earnings drift (G14) |
| Investor clienteles (G24) | Stock return predictability (G17) |