Smart money or chasing stars: Evidence from northbound trading in China

Cunfei Liao, Guohao Tang and Xiaoying Xu

International Journal of Finance & Economics, 2024, vol. 29, issue 2, 1781-1803

Abstract: To explore what kinds of roles foreign investors take in a gradually opening financial market, we propose the abnormal holding value ratio (AHVR) of northbound investors among stocks through China's Stock Connect Mechanism. We find that AHVR positively predicts the expected stock returns and significantly relates to firms' quality‐related fundamental information, especially profitability. Foreign investors learn the firm fundamentals before they invest in the Chinese market, which is different from the trading behaviour of domestic individual investors. The AHVR premium is larger among firms with higher attention of analysts who focus on effective information and with lower attention of individual investors who have behavioural bias. In all, the northbound inflows are smart money, which will increase the efficiency of the Chinese market instead of simply chasing stars that only grab investors' attention.

Date: 2024
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