Retail and Institutional Investor Trading Behaviors: Evidence from China

Lin Tan (), Xiaoyan Zhang () and Xinran Zhang
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Lin Tan: PBC School of Finance, Tsinghua University, Beijing, China
Xiaoyan Zhang: PBC School of Finance, Tsinghua University, Beijing, China
Xinran Zhang: School of Finance, Central University of Finance and Economics, Beijing, China

Annual Review of Financial Economics, 2024, vol. 16, issue 1, 459-483

Abstract: We study two important questions regarding trading dynamics in China: How do retail and institutional investors trade, and what are the underlying factors for these behaviors? Different from the United States, China's stock market has two prominent features: dominance of retail investors and active participation by the government. After reviewing nearly 100 previous studies, we reach three conclusions. First, there is substantial heterogeneity in retail investors. Small retail investors have low financial literacy, exhibit behavioral biases, and not surprisingly, negatively predict future returns, whereas large retail investors and institutions are capable of processing information and positively predict future returns. Second, the macro- and firm-level information environment in China is slowly but gradually improving, which greatly affects trading behaviors of different investors, especially the more sophisticated institutional investors and large retail investors. Finally, the Chinese government actively adjusts their regulations on the stock market to serve the dual goals of growth and stability. Many regulations are effective, while some may generate unintended consequences.

Keywords: government regulation; retail investors; information efficiency; institutional investors; Chinese stock market (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G18 G23 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1146/annurev-financial-082123-110132

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