2012 Deloitte Touche Tohmatsu – Fudan Accounting Forum 12

In the stock market, institutional investors are regarded as the most matured and professional players. Nowadays in the highly integrated global market, their names can be found in almost every open economy. However, the styles of portfolio management are not necessarily the same. Some institutions would like to manage their portfolios based on the analysis of macro-economic performance as well as of fundamentals in industries, while some others would like to pick up firms one by one. This divergence of management reflects their preferences on different types of information – market-wide and firm-specific information, with the former type mainly relying on market-wide information and the latter focusing on firms’ financial reports.

One question comes up naturally: What determines institutional investors’ information preferences? In simple words, which kind of investors would focus on the market and which kind of investors would scrutinize financial reports?

This question was answered by Professor Jeong-Bon Kim from City University of Hong Kong, when he delivered a lecture on the Deloitte-Fudan Accounting Forum in the School of Management, Fudan University, on April 9, 2012. Based on the theoretical foundation of information cost, Prof. Kim and his co-authors analyzed why and how the different types of institutional investors make different decisions in terms of information flow preferences.

According to their co-authored research work, institutional investors are categorized into 12 different types, with considerations of their national origins, ownership structure and investment horizons. More specifically, their identities are further divided into domestic versus foreign, large-stake versus small-stake, common-law country versus code-law country, and long-term horizon versus short-term horizon categories. The average cost of information acquisition and usage differs among different types of institutional investors and leads to the divergence of information demand.

For example, foreign institutional investors who allocate portfolios worldwide are likely to exercise more complex asset-pricing technologies, and it is also easier for them to hedge the risks of different markets, and therefore firm-specific information is commonly welcomed by this type of investors. Thus, stocks with higher ownership of foreign investors are more likely to reflect specific characters, meaning lower co-movement of these stocks with the market.

Compared with foreign institutional investors, domestic institutional investors’ portfolios are in large part composed of domestic stocks. Thus, this type of investors will be more sensitive to market and industry information and stocks mainly held by these investors show a relatively high co-movement with the market.

Which one performs better to allocate assets? Prof. Kim tends to answer this question in his future research.

(Reported by BKonline)

April 22, 2012