Institutional Investors And Financial Stability

With the advocacy of "Energetically Promoting Institutional Investors" from the Security Regulatory Commission and leaping development of the stock market in China, institutional investors have replaced the role of individual investors to become the dominant investors in financial markets. Compared with individual investors, institutional investors have apparent advantages in information and scale. According to classic financial theory, the assumption of "rational investor" is more applicable to institutional investors, and the financial market will become more efficient and stable since institutional investors become the mainstream in the market. While a lot of researches find that institutional investors did not perform that well, its behavior do not inhibit the excess volatility of asset price, but do harm to financial market stability.Why institutional investors increasing the excess volatility of asset price? Concerning the advantages in scale and information as well as professional and reasonable investment decision-making, we do not think the Behavioral Theory performs well enough in explaining the "behavioral bias" exhibited by institutional investors. By deliberately research, we attribute the behavioral bias and so caused financial market instability to objective conflicts between principle (investors) and agent (investment managers).In this dissertation, we first introduce briefly basic theories and related literatures, then, on the basis of research on the relation between institutional investors and financial market stability, we deliberately analyze the behavioral bias and its influence on market stability from the principle-agent view. Lastly, we put forward some suggestions from the perspectives of optimal compensation contract and governance structure.The major innovations of the thesis lay in the following aspects: Firstly the current literatures seldom make systematic discussion the micro mechanism of institutional investors' behavioral bias affecting financial market stability, especially from the principle-agent view, therefore this paper is quite innovative in its perspective of research. Secondly, in the forth chapter, this paper establishes a theoretical model on the relation between institutional investors and financial market, to provide support on empirical research; then, in the empirical research part, we take the newest data to analyze the relation from the perspectives of whole market and single security. Besides, this paper takes the objective function of investment managers into consideration, after deliberately research on how behavioral bias, which is caused by principle-agent problem, influencing the financial market stability, the paper draws its conclusion and puts forward some suggestions.