| Investors in China’s stock market are keen to hype up eye-catching “concept stocks”,which,unlike ordinary stocks,are priced out of fundamentals,offer high shortterm returns and have the characters of lottery tickets.The behavior of investors chasing concept stocks like buying lottery tickets will cause the stock market bubble to produce,expand and burst.On the one hand,the capital market is deviated from the real economy,and the price cannot effectively reflect the intrinsic value of enterprises.The phenomenon of stock market boom and slump is getting more and more serious,which makes China’s capital market much blamed.On the other hand,most investors were “cut leek” from the speculation of concept stocks rather than make profits,but the enthusiasm of investors on the concept and theme related stocks has not been reduced.Looking back at the history of China’s capital market over the past two decades,one after another concept stocks emerged.As long as relying on some hot theme or story,can investors be attracted to rally to support the stock price.What caused this special phenomenon in China’s capital market? And how to govern?This paper uses gambling preference theory to study the cause and consequence of concept stock speculation.General theoretical research reveals that individual investors have gaming preferences,which is the root of the concept hype,and institutional investors are generally considered to be relatively mature investors who play arbitrageurs role,are able to exploit and correct the mispricing caused by immature investors,and improve the informational efficiency of stock prices.However,the gambling nature of China’s stock market is still strong,the speculation phenomenon of concept stocks is endless,and various kinds of speculation has not been well restrained.The development and growth of institutional investors did not eliminate the speculation in the stock market as expected.Recent academic research has found that institutional investors do not always follow the “anomaly prescription”(selling overvalued stocks,buying undervalued ones),and even have strong tendency to buy overvalued short-side stocks.These findings suggest that while individual investors are considered prime examples of “noise traders”,institutional investors also allocate to riskier speculative stocks.Therefore,it can be speculated that institutional investors may also have gambling preferences.This paper finds that institutional investors will also overallocate concept stocks and exhibit gambling preference behaviors similar to individual investors,but different from individual investors,institutional investors’ gambling preference accords with rational speculation theory.According to the theory of rational speculation,institutional investors create concepts and participate in speculation for the purpose of bubble riding,that is,buying overvalued stocks whose prices will continue to grow and selling them before the bubble bursts to obtain higher returns.Therefore,institutional investors are the real source of endless speculation on concept stocks.The lottery feature of high yield but low probability of concept stocks triggered the following speculation behavior of individual investors in the stock market,which made the institutional investors who created and speculated the concept benefit from it.However,it promoted the further expansion of the stock market bubble and caused violent fluctuations in the market,making individual investors become “leeks” and their wealth was damaged.Based on the theoretical and empirical researches of lottery stocks,this paper constructs a conceptual measure of stock and finds that there is a significant concept stock premium in China’s stock market,that is,the stock price of concept stock is overvalued in the current period and will reverse in the future.The premium effect of concept stocks is more significant in the period when the market mispricing is more serious,and is also more significant in the stocks with more binding arbitrage constraints,which is consistent with the mispricing hypothesis and arbitrage constraint hypothesis.It is worth noting that the premium effect of concept stocks still exists significantly even in the period when investor sentiment is relatively low or in the stocks with a high proportion held by institutional investors.Overpricing of concept stocks is common regardless of market-wide investor sentiment and the level of institutional investor ownership.This fact suggests that the concept premium effect may not be entirely driven by irrational investor sentiment,and institutional investors may not always trade in the opposite direction of mispricing.Some institutional investors may be the driving force behind the speculation of concept stocks in the stock market.By analyzing institutional investors’ preference for concept stocks,this paper reveals the real purpose of institutional investors’ participation in hyping concept stocks.This paper constructs the concept stock preference measure of institutional investors,and finds that there is no obvious concept stock preference among institutional investors on the whole,but the preference among different institutional investors is quite different,and some institutional investors overallocate concept stocks,showing gambling preference.It is found that institutional investors with strong preference for concept stocks will buy more bubble stocks and get higher returns,which is consistent with the behavior and expected consequences of rational bubble riding.The mechanism test shows that institutional investors with strong preference for concept stocks get higher returns in the trading of concept stocks,and the stocks with strong concept characters contribute more to the returns of institutional investors.Heterogeneity analysis shows that the bubble riding behavior of institutional investors on concept stocks is more intense when the market rises and falls,investor sentiment is high,crosssectional stock return dispersion is high and the market lacks liquidity,and institutional investors can obtain more returns.Institutional investors with more private information and better informed trading ability also have stronger bubble riding behavior on concept stocks,and they can get more bubble riding returns than other institutions.We also find that institutional investors’ preference for concept stocks does not predict future performance,but fund investors will chase funds holding concept stocks,and concept stock holdings have a reinforcing effect on fund’s flow-performance sensitivity.Further study on the market consequences of institutional investors’ preference for concept stocks shows that the stocks heavily held by institutional investors who have preference for concept stocks have higher volatility in the future.This shows that institutional investors,who have always been regarded as rational and stabling market,boosted the further expansion of the stock market bubble by riding the bubble on the concept stocks,causing the drastic fluctuations in the market.At the same time,we find that institutional investors’ preference for concept stocks has significant heterogeneity.Long-term institutions hate concept stocks,but short-term institutions overallocate concept stocks.This result indicates that institutional investors with different investment horizons may have different influences on stock price effectiveness and stock information efficiency.Institutional investors in China’s stock market generally hold shares for a short period of time,change hands too frequently,and the short term trading is popular in the market.However,the relationship between institutional investors’ short term trading and stock price effectiveness has not reached a consistent conclusion in existing studies.Based on Cremers and Pareek(2015),we construct fund duration index to measure the average holding time of the fund and serve as a proxy variable of the investment horizon of institutional investors.It is found that the holding duration of institutional investors is persistent,which is a stable reflection of the investment strategy and style of institutional investors.Research at the fund level shows that in the period of market rise,institutional investors with shorter holding duration tend to buy in large quantities,especially eye-catching concept stocks,which further leads to positive feedback trading of noise traders,resulting in the stock market bubble expansion.In the period of market decline,institutional investors with shorter holding duration are more inclined to sell stocks in large quantities,thus causing huge selling pressure on stocks held by shortduration funds,resulting in sharp price declines.The research at the stock level shows that short-term institutional investors will aggravate the current premium and future return reversal of concept stocks,that is,the concept stocks held by short-term institutional investors will have lower returns in the future.In addition,for stocks with higher arbitrage trading costs,such as small-capitalization stocks or growth stocks,stocks with low analyst attention or high divergence of analyst forecasts,stocks with low liquidity or stocks with high idiosyncratic volatility,short-term institutions will have a more significant impact on current premium and future return reversals.The findings of this paper show that short-term institutional investors do not promote the information efficiency of the stock market,but will aggravate the mispricing and the rise and fall of the stock market,which is not conducive to the efficiency of stock prices.At the same time,this paper finds that institutional investors with long investment horizon can mitigate the premium for the current period and the future return reversal of concept stocks,have an inhibitory effect to the sharp fluctuations in the stock market.This kind of institutional investors are more likely to focus on the analysis and prediction of the basic value of the company rather than the prediction of trading behavior and tendency of other investors.This shows that the policy and mechanism of encouraging long-term institutional investment is beneficial to controlling the stock market bubble and has direct significance on promoting price rationality and protecting the interests of small and medium investors.Using rational speculation theory,this paper reveals for the first time institutional investors’ bubble riding behavior for concept stocks,which may be an important driving force for the speculation of concept stocks in China’s stock market.This study has certain theoretical and practical significance:(1)The results of this paper confirm that,unlike individual investors whose preference for concept stocks comes from behavioral bias and results in loss of returns,institutional investors’ preference for concept stocks comes from rational bubble riding motivation,and institutional investors get higher returns through bubble riding of concept stocks.This conforms to the rational speculation theory of De Long et al.(1990b)and Abreu and Brunnermeier(2002,2003),and provides a realistic basis for this theory.(2)While the institutional investor’s preference for concept stocks is “rational” behavior for itself to improve the performance,but for the market,it has induced other investors to keen on stock speculation rather than focus on fundamentals,lead to the capital market deviate from the real economy,so it shows that institutional investors “rational” behavior also may be one reason for the market instability.(3)The conclusion of this paper also shows that,for rational investors,trading against mispricing is not always optimal,and mature institutional investors may not correct mispricing,but ride the price bubble,encouraging prices to further deviate from the fundamentals,and making stock prices more unstable.This is not consistent with the view of efficient market hypothesis that mature traders always act as arbitragers to correct mispricing,so it should be paid more attention by supervision.(4)This paper also finds that long-term institutional investors do not have a significant preference for concept stocks,while short-term institutional investors are more likely to create and hype concept stocks,resulting in the further expansion and collapse of the stock market bubble,which is not conducive to the effectiveness of stock prices.This shows that only long-term investment behavior of institutional investors is really conducive to the improvement of market effectiveness,and policies and mechanisms that encourage long-term institutional investment are conducive to controlling stock market bubbles from the source,promoting value discovery and protecting the interests of small and medium investors.In short,from the perspective of stock market bubble riding,this paper reveals that institutional investors may be the source of concept stocks speculation in China’s stock market.They will make concept stocks and profit from them in order to take advantage of individual investors’ preference for themes and hot spots. |
