Emerging Markets Review: Yunqi Fan, Hui Fu T

Emerging Markets Review 42 (2020) 100670
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Emerging Markets Review

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Institutional investors, selling pressure and crash risk: Evidence

T
from China
Yunqi Fan , Hui Fu
⁎
School of Business, Jiangnan University, China
ARTICLE INFO ABSTRACT
JEL classification:: Inconsistent with prior literature on the US stock market, our evidence shows the negative role of
G20 institutional investors who exacerbate subsequent crash risk in China. This is because institu-
G32 tional ownership amplifies the selling pressure in response to firm’s bad news, which in turn leads
to higher stock price crash risk. The positive relation between institutional ownership and crash
Keywords:: risk is more (less) pronounced for transient (dedicated) institutional investors, suggesting the
Selling pressure
selling pressure of short-term investors is heavier. Additionally, competition of institutional in-
Crash risk
vestors strengthens institutional selling pressure and hence exacerbates the effect of institutional
Institutional investor type
Investor competition ownership on crash risk.
1. Introduction
Recent research documents the positive role of institutional investors in alleviating firm-specific stock price crash risk (An and
Zhang, 2013; Callen and Fang, 2013). According to these studies, institutional investors, especially dedicated institutional investors,
are motivated to monitor managers’ extraction of the firm’s cash flows, and therefore reduce firm-specific crash risk. However, such
insight can hardly reconcile with the practice in the Chinese A-shares market. In view of the prior judgment that institutional
investors can guide value investment and long-term investment concept, and the huge gap between A-shares market and international
mature market in the position of institutional investors, China’s securities regulatory authorities put forward the practice of “su-
pernormal development of institutional investors” in 2000, hoping to optimize the structure of investors in A-shares market. How-
ever, institutional investors continued to grow slowly in the subsequent bear market. The strong bull market of A-shares market in
2005–2007 simulated the explosive growth of institutional investors, and a large number of cash flow from household savings into
the fund market. Taking mutual fund as an example, her stock holding value was 102 billion Yuan at the end of 2005, while it
increased to more than 2.46 trillion Yuan at the end of 2007. However, the stability of the market does not increase after the
explosive growth of institutional investors. For example, during the stock market crash in A-shares market in 2015, in order to
maintain the stability of the stock market, the securities regulatory authorities joined the public security departments to crack down
on malicious short-selling, regarding institutional investors as the main target. It can be seen that whether institutional investors can
stabilize the market in A-shares market is still worth pondering deeply.
The purpose of this study is to examine the relation between institutional investors and firm-specific stock price crash risk in A-
shares market. We conjecture that the relation between institutional investors and crash risk in A-shares market differs from the
expectations of the prior literatures (An and Zhang, 2013; Callen and Fang, 2013). This difference stems from the gap between the
monitoring roles of institutional investors in A-shares market and mature markets, such as U.S. market. Institutional investors exert
⁎
Corresponding author at: Faculty of School of Business, Jiangnan University, 1800 Lihu Avenue, Binhu District, Wuxi 214122, China.
E-mail address: fanyunqi@jiangnan.edu.cn (Y. Fan).
https://doi.org/10.1016/j.ememar.2019.100670
Received 4 July 2019; Received in revised form 27 November 2019; Accepted 5 December 2019
Available online 06 December 2019
1566-0141/ © 2019 Elsevier B.V. All rights reserved.
Y. Fan and H. Fu Emerging Markets Review 42 (2020) 100670
governance through monitoring firm’s operation directly (known as “voice”) and selling their stocks (known as “exit”) in the mature
markets.1 However, institutional investors in A-shares market can only exit and can hardly voice for several reasons.2 The scene in
which institutional investors just exit without voice induces themselves place excessive emphasis on short-term profits (Callen and
Fang, 2013). Institutional investors with short-termism may sell off their stocks heavily in response to firm’s bad news (Bushee, 1998,
2001; Yan and Zhang, 2009; Manconi et al., 2012; Callen and Fang, 2013). Such heavy selling pressure from institutional investors’
exit could amplify market response to bad news about firms and increase stock price crash risk. Given these considerations, we
propose that institutional investors play negative effect on crash risk. In other words, institutional ownership exacerbates stock price
crash risk.
To test our proposition, we employ a large sample of listed firms in A-shares market from 2005 to 2016. Our sample starts from
2005 for two reasons. First, it was not until 2005 that institutional investors in China developed rapidly and became major players in
the market. Second, split-share structure reform (SSSR) in China starts in May 2005.3 Our results are robust and consistent with our
expectation.
This study has several interesting findings. First, we provide evidence that institutional ownership is positively related to future
stock price crash risk. The effect is economically and statistically significant. We document that selling pressure of institutional exit is
the key mechanism driven the positive relation between institutional investors and stock price crash risk. That is, when firm’s bad
news is discovered, institutional investors may sell off their stocks aggressively, which then amplify market response to the bad news
and exacerbate stock price crash risk. All of these results are shown to be robust. Second, upon developing a Bushee (1998, 2001)
style classification of institutional investors, we find the positive relation between institutional ownership and future crash risk is
more (less) pronounced for transient (dedicated) institutions. This result is consistent with the view that institutional investors with
short-term horizon and small stakes tend to trade more aggressively (Yan and Zhang, 2009; Manconi et al., 2012). Third, our evidence
shows that the relation between institutional ownership and future crash risk is more pronounced for stocks with more institutional
investor competition. Our empirical evidence is robust for both two sets of proxies of institutional investor competition developed by
Akins et al. (2012). Thus, institutional investor competition induces competitive trading which strengthens institutional selling
pressure on firm’s bad news.
The most related literatures to this study are An and Zhang (2013) and Callen and Fang (2013), both of which examine the
relation between institutional ownership and crash risk in the U.S. market and find positive role of institutional investors in alle-
viating crash risk. However, mechanism of this relation is somewhat ambiguous.4 Unlike these literatures, we examine the relation
between institutional investors and crash risk in A-shares market and find negative role of institutional investors which is inconsistent
with that in the US market.5 We document the key to understanding this negative role of institutional investor lies in that institutional
investor in A-shares market is only possible to exit in response to firm’s bad news. Heavy selling pressure of institutional investors’
exit would amplify market response to firm’s bad news and hence exacerbate stock price crash risk.
Our study contributes to the literature in several aspects. Our findings advance our understanding of institutional investor’s role
and her impact on stock price crash risk. The documented mediating effect of selling pressure of institutional exit on the relation
between institutional investors and crash risk complements previous literature in a number of ways. First, to our knowledge, this
study is the first study to examine the relation between institutional ownership and crash risk in A-shares market, and provide direct
evidence on the role of selling pressure of institutional exit in explaining this relation. By focusing on the perspective of crash risk,
this study provides new evidence on the role of institutional investors on corporate governance. Do institutional investors exert
monitoring roles through voice or exit? Our study suggests that institutional investors can only exit but not voice in A-shares market
and bring additional negative shocks to stock price. Thus, our study is useful for understanding the role of institutional investors in
corporate governance in China and even other emerging countries.
Second, this study extends research on institutional investors and financial market. There is an ongoing debate that whether
institutional investors benefit or harm financial market. Some literatures accept that institutional investors are more informed and
increase market efficiency (Sias and Starks, 1997; Nagel, 2005; Barber and Odean, 2008; Boehmer and Kelley, 2009; Gallagher et al.,
2013), while others suggest that institutional investors emphasize on short-term performance (Bushee, 1998, 2001; Yan and Zhang,
2009; Manconi et al., 2012), intensify managerial myopia (Matsumoto, 2002; Le et al., 2006; Chen et al., 2015), induce more CEO
power (Schmidt and Fahlenbrach, 2017), increase costs of company debt (Kim et al., 2019). We provide new evidence from emerging
market. Our results identify significant costs that institutional investors exacerbate stock price crash risk. This is also useful for
understanding the effect of institutional investors on market welfare in A-shares market.
Third, this study provides empirical evidence for theoretical literature about the economic outcomes of blockholder exit. Classical
theory shows that blockholder exerts governance through voice. Recent theoretical analysis suggests blockholder can exert
1
See Edmans (2014) for an excellent survey.
2
Detailed explanation of the reasons is presented in Section 2.
3
SSSR starts in 2005-5-9. Our sample includes 2005 because the variables of crash risk forward for one year in our empirical model. In Section 4.2,
we show that empirical results are still robust for sub-samples after 2005.
4
An and Zhang (2013) documents the influence of institutional investors to crash risk goes beyond accounting opacity, tax avoidance, and
shareholder rights. Callen and Fang (2013) also find the influence goes beyond accounting opacity. Unfortunately, no additional explanation of the
mechanism is provided in these literatures.
5
Specific to different types of institutional investors, both of An and Zhang (2013) and Callen and Fang (2013) find dedicated (transit) institu-
tional investors’ ownership is negatively (positively) related to crash risk. Whereas, we documents that all kinds of institutional investors’ ownership
is positively related to crash risk in A-shares market.
2
governance through exit, even without voice (Admati and Pfleiderer, 2009; Edmans, 2009). Although blockholder governance ty-
pically improves firm’s value, blockholder exit may also worsen the agency problem and reduce firm’s value even if the manager is
maximizing value, due to her dissatisfaction with small value increase created by the manager’s effort (Admati and Pfleiderer, 2009)
and/or her multifirm ownership (Edmans et al., 2014). Empirical evidence documents institutional sale has temporary and per-
manent effect of reducing stock price (Holthausen et al., 1990; Sias et al., 2006; Collin-Dufresne and Fos, 2015). Our study sup-
plements new evidence from the perspective of stock price crash risk, by showing that both the level of institutional holdings (threat
of exit) and the volume of institutional selling (action of exit) cause greater crash risk, suggesting that blockholder exit amplifies
financial market response to firm’s bad news.
Fourth, this study provides new evidence on the effect of investor competition. While the idea that institutional investor com-
petition strengthens institutional exit by heavily selling has been discussed in theoretical literature (e.g. Kyle, 1985; Easley and
O’hara, 2004; Edmans and Manso, 2011), empirical evidence is very limited. The special environment in A-shares market where
institutional investors exert governance just through exit provides us a valuable opportunity to access the effect of investor com-
petition on institutional exit. Based on empirical proxies for institutional investor competition over information developed by Akins
et al. (2012), we provide new evidence on the outcomes of such competition from crash risk perspective. Our result suggests that
institutional investor competition amplifies the effect of institutional investors on crash risk, which means institutional investor
competition strengthens institutional selling pressure.
The reminder of the paper is organized as follow. Section 2 reviews the literature, analyzes the practical dilemma, and develops
our hypotheses. Section 3 outlines the methodology. Section 4 describes the sample and data. Section 5 presents and discusses
empirical results, and Section 6 concludes.
2. Literature review, practical dilemma and hypothesis development
Stock price crash risk has been a popular subject in financial studies. Early research focuses on market crashes and can be divided
into three categories: (1) rational models with incomplete information aggregation; (2) volatility feedback models; and (3) behavioral
models. Rational models with incomplete information aggregation (e.g. Gennotte and Leland, 1990; Romer, 1993; Marsh and
Wagner, 2004) root in a rational expectation equilibrium framework and explain large movements in stock price in the absence of
external news about fundamentals. Volatility feedback models (e.g. Campbell and Hentschel, 1992) set in a representative agent
framework and account for asymmetries in large price movements. Behavioral models explain market crashes from the perspectives
of investors’ sentiment (Shiller, 1989) and differences of opinion (Hong and Stein, 2003).
Recent research relies on the perspective of accumulation of bad news and concentrates on firm-specific crash risk. This stream of
literature (Jin and Myers, 2006; Hutton et al., 2009) documents that, when firm’s hidden bad news reaches a tipping point, the
insiders give up and all the bad news comes out together, resulting in stock price crash. Following the bad news hoarding theory,
Chang et al. (2017) summarize three items which influence crash risk: the likelihood of bad news formation (i.e., the likelihood that
bad news arises because of managerial underperformance or a negative shock), the extent of managerial bad news hoarding (i.e.,
whether, once bad news arises, it is released or hoarded by managers), and the strength of the market response when bad news is
revealed. Recent empirical literature mainly focuses on the influence of the likelihood of bad news formation and the extent of
managerial bad news hoarding to crash risk (Hutton et al., 2009; Kim et al., 2011a, 2011b; An and Zhang, 2013; Callen and Fang,
2013, 2015a, 2015b; Deng et al., 2018).
Following the bad news hoarding theory of crash risk, recent empirical evidence (An and Zhang, 2013; Callen and Fang, 2013)
shows that institutional investors alleviate stock price crash risk in U.S. market. Much more than that, An and Zhang (2013) and
Callen and Fang (2013) also point out that the mechanism between institutional investors and crash risk is still ambiguous. An and
Zhang (2013) use multiple proxies for managerial bad news hoarding, including accounting opacity, tax avoidance, and shareholder
rights, and document that the influence of institutional investors goes beyond managerial bad news hoarding. Callen and Fang (2013)
use financial reporting opaqueness as proxy and find similar results. Unfortunately, no further research is conducted on this issue.
This study conjectures that the relation between institutional investors and crash risk in A-shares market differs from the ex-
pectations of the prior literatures (An and Zhang, 2013; Callen and Fang, 2013). This difference stems from the practical dilemma of
institutional investors monitoring in A-shares market. Although, in theory, institutional investors could exert monitoring roles
through voice (active intervention) and exit (trading), institutional investors in A-shares market can only exit in reality. This practical
dilemma stems from several aspects. First, most listing firms in A-shares market are highly controlled by sole majority shareholder.
For example, in the end of 2016, the mean and medium of shareholding ratio of sole majority shareholder in A-share listed companies
is 34.67 percent and 32.41 percent. Sole majority shareholder in 82.06 percent of the A-share listed companies hold more than 20
percent of the shares,6 whereas La Porta et al. (1999) document that only 20 percent (10 percent) of large (medium) US firms feature
a blockholder with at least 20 percent. As a result, institutional investors in A-shares market are impossible to win in a proxy fight.
Anecdotal evidence confirms that institutional investors hadn’t implemented active intervention until 2012. In the board election of
Gree Electric Appliance in 2012, the director Feng, who was jointly elected by Yale University Foundation and Penghua fund, entered
the board of directors. Securities Times, which is official media affiliate to People’s Daily, comments on this event as “The selection of
directors by the fund to participate in the operation of listed companies initiated the active participation of institutional investors in
corporate governance, which changed the situation of passive choice in the past”. However, similar event of institutional active
6
Data source: Wind database.
3
monitoring is still rarely happen in A-shares market from then on. Therefore, institutional investors in A-shares market usually hold
too small stake to voice in practice.
Second, most institutional investors are inexperienced to voice. Taking mutual fund in A-shares market as an example, by the end
of 2015, there were 1273 registered public fund managers, with the highest proportion of who aged 30–35, accounting for 43.75
percent; followed by those aged 35–45, accounting for 40.46 percent; those under age 30, accounting for 11 percent; and those aged
45–55, accounting for only 4.79 percent. There are no fund managers aged 55 or above.7 These mutual fund managers usually just
have a few years of industry research experience, and are lack of business management experience to voice.
Third, most institutional investors lack of willingness to voice. On average, in A-shares market each mutual fund manager
manages 2.2 funds, of which the largest number of managed funds is 19, and the cumulative years of working as a fund manager
average 2.62 years.8 Divergence of attention caused by managing multiple funds and short term of servicing make monitoring costly
and/or time consuming, therefore institutional investors prefer exit to voice in response to unfavorable performance of the company
management (Coffee, 1991; Manconi et al., 2012; Callen and Fang, 2013).
Above all, the relation between institutional investors and stock price crash risk deserves further study, not only because the
mechanism is still confusing, but also because the reality in A-shares market is hard to reconcile with current literature focusing on
the U.S. market. Institutional investors in A-shares market could only exit (trading) on firm’s bad news, but not voice (active in-
tervention).
The scene in which institutional investors just exit without voice induces themselves place excessive emphasis on short-term
profits (Callen and Fang, 2013). Institutional investors with short-termism may sell off their stocks heavily on near-term earnings
disappointments (Bushee, 1998, 2001; Yan and Zhang, 2009; Manconi et al., 2012). Such heavy selling pressure of institutional
investors’ exit would amplify financial market response to firm’s bad news and thus exacerbate stock price crash risk. Given these
considerations, we propose our hypothesis regarding the relation between institutional investors and crash risk:
H1. Institutional ownership is positive associated with future stock price crash risk.
Keim and Madhavan (1995) find that short-term (e.g. momentum) institutional investors prefer rapid execution, whereas long-
term (e.g. value managers) institutional investors prefer slow and discreet execution. Kyle (1985) shows that blockholder will
strategically limit her order to hide private information. Edmans (2009) finds that blockholder will not sell her entire stake upon a
negative signal immediately because the price impact would be too high. Brown et al. (2010) propose that myopic investor is inclined
to sell more to unwind a portfolio. Thus, prior literature suggests that institutional investors with more portfolio turnover and less
holding concentration tend to sell more rapidly and heavily, inducing more selling pressure in response to firm’s bad news. Given
these consideration, we have the following hypothesis:
H2. The positive relation between institutional ownership and crash risk is more (less) pronounced for transient (dedicated)
institutional investors.
Theory of institutional investor competition over information shows that institutional ownership structure is a determinant of the
effectiveness of exit. Once institutional investors find negative information and decide to exit, they are concerned only with max-
imizing their trading profit. In contrast to the scene where a single blockholder will strategically limit her order to hide her private
information (Kyle, 1985), coordination difficulties of multiple competing blockholders strengthen their exit (Holden and
Subrahmanyam, 1992; Edmans and Manso, 2011). Thus, prior literature suggests that competitive trading of institutional investors
strengthens their selling pressure on firm’s bad news. Given these consideration, we have the following hypothesis:
H3. The positive relation between institutional ownership and future crash risk is more pronounced for stocks with more institutional
investor competition.
3. Methodology
3.1. Firm-specific crash risk
Following the literature (Kim et al., 2011a, 2011b; Xu et al., 2014), we adopt two measures of firm-specific crash risk for each
firm-year observation to provide robust conclusions: the negative coefficient of skewness of firm-specific weekly returns (NCSKEW),
and the down-to-up volatility of firm-specific weekly returns (DUVOL).
We first run the following extended market model regression for each firm and year:
Ri, t = i + 1 Rm, t 2 + 2 Rm, t 1 + 3 Rm, t + 4 Rm, t + 1 + 5 Rm, t + 2 + i, t , (1)
where Ri,t is the return of stock i in week t in year T, Rm,t is the tradable value-weighted A-shares market return in week t in year T.
The lead and lag terms for the market index return are included to correct for nonsynchronous trading. The firm-specific weekly
return for firm i in week t in year T, denoted as Wi,t, is calculated as:
7
Data Source: China Securities Investment Fund Industry Annual Report 2015 issued by China Securities Investment Fund Industry Association.
8
Data Source: Wind database and China Securities Investment Fund Industry Annual Report 2015 issued by China Securities Investment Fund
Industry Association.
4
Wi, t = ln(1 + i, t ) (2)
Then, we calculate NCSKEW for each firm-year observation as the negative of the third moment of firm-specific weekly returns,
divided by the cubed standard deviation. That is,
3
2
3
NCSKEWi, T = n (n 1) 2 Wi3, t / (n 1)(n 2) Wi2, t ,
t t
(3)
where n is the number of observations of firm-specific weekly returns in year T. A higher NCSKEWi,T suggests that a company’s stock
price is more “crash prone.”
We calculate DUVOL for each firm-year observation as follows:
DUVOLi, T = log (nU 1) Wi2, t /(nD 1) Wi2, t

DOWN UP (4)
where nU and nD are the number of up and down weeks over the fiscal year T, respectively. For each stock i in year T, we separate all
the weeks with firm-specific weekly returns above (below) the mean in T year and call this the “up” (“down”) sample. We then
calculate the log ratio of the standard deviation of the “down” sample to the standard deviation of the “up” sample. Similar to
NCSKEWi,T, DUVOLi,T indicates the degree of “crash-prone” of a stock. But DUVOLi,T is less likely to be affected by extreme returns
than NCSKEWi,T.
3.2. Classification of institutional investors
Following Bushee (1998, 2001), our classification of institutional investors is based on their stake size and ownership stability.
This classification is also used in An and Zhang (2013) and Callen and Fang (2013). Stake size is measured by four variables: the
average percentage of an institution’s total equity holdings invested in each portfolio firm (CONC), the average size of the institution’s
ownership position in her portfolio firms (APH), the percentage of institution’s equity that is invested in firms where it has greater
than 5 percentage of ownership (LBPH), and a Herfindahl measure of concentration calculated using the squared percentage own-
ership in each portfolio firm (HERF). Ownership stability is measured by two variables: the average absolute change in the in-
stitution’s ownership positions over a half year (PT), the percentage of the institution’s stock that is held for more than one year
(STAB).9
Referring to Bushee (1998), we perform principle components analysis with an oblique rotation to mitigate the colinearity of the
six variables of institutional characteristics above. Through this procedure, we get a tight set of common factors that explain the
shared variance among the characteristics of the six variables of institutional characteristics. Then, we calculate standardized factor
scores and perform k-means cluster analysis on the factor scores to obtain the final classification of institutional investors. Results are
discussed in Section 5.4.1.
3.3. Institutional investor competition over information
Following Akins et al. (2012), we use two sets of proxies for institutional investor competition over information. In the first set,
our first proxy is the number of institutional investors holding the firm’s stock (#Inst). The higher value of #Inst means more
competition in the trades of stock i. Our second proxy in the first set is a Herfindahl index (HerfInst) of the relative holdings of shares
of each institutional investor for a given firm. The computation is as follows at each fiscal year T:
N 2
HoldInsti, j, T
HerfInsti, T = 1×
j=1
HoldInsti, T (5)
where HoldInsti,T is the number of shares held by institutional investors in stock i at the end of year T, HoldTransi,j,T is the number of
shares held by institutional investor j in stock i at the end of year T, and N is the total number of institutional investors in stock i at the
end of year T. The Herfindahl index is multiplied by −1 so that a higher value of it means more competition in the trade of stock i.
The second set of proxies for institutional investor competition is employed to ensure the robustness of our results. This set of
proxies is in the same vein as the first set of proxies based on total institutional investors ownership, but just measure the number of
transient institutional investors, #Trans, and the Herfindahl index of transient institutional investors, HerfTrans.
9
More details of the six variables are showed in Bushee (1998, 2001). There is a small difference in STAB between Bushee (1998, 2001) and ours.
Bushee (1998, 2001) defines STAB as the fraction that is held more than 2 years. The reason we use a shorter time horizon is because institutional
investors’ portfolio turnover in A-shares market is far above that in developed market. For example, average portfolio turnover of mutual fund in A-
shares market in 2017 is 297 percent, whereas it is only 26 percent in the U.S. market.
5
3.4. Control variables
When selecting control variables as potential predictors of stock crash risk, we follow the guidance of literature (Chen et al., 2001;
Jin and Myers, 2006; Hutton et al., 2009; Kim et al., 2011a, 2011b; Xu et al., 2014; Callen and Fang, 2015a, 2015b). Unless stated
otherwise, all these variables are annual (over a year or at the end of a year). Our control variables are one-period lagged and include:
NCSKEWT, one-period lagged crash risk; LNSIZET, the natural logarithm of market value of equity; ROET, returns on equity; DTURNT,
the incremental average monthly share turnover in a year over the previous year, where monthly share turnover is calculated as the
monthly share trading volume divided by the number of tradable shares outstanding over the month; MTBT, the market-to-book ratio;
LEVT, the book value of all liabilities divided by total assets; KUTRT, the kurtosis of firm-specific weekly returns; RETT, the cumulative
firm-specific weekly returns; SIGMAT, the standard deviation of firm-specific weekly returns; ABACCT, the absolute value of dis-
cretionary accruals, where discretionary accruals are estimated with the modified Jones model (Dechow et al., 1995); IDIOT, the
idiosyncratic risk, which is calculated following Hutton et al. (2009).
Appendix A summarizes the variable definitions used in this study.
3.5. Basic regression model
To examine the effect of institutional ownership on firm-specific stock price crash risk (H.1), we specify our basic regression
model below:
k
CrashRiski, T + 1 = 0 + 1 IOi, T + k Controlsi, T + IndustryDummies + YearDummies + i, T
k (6)
where CrashRiski,T+1 is measured by NCSKEWi,T+1 or DUVOLi,T+1. The main variable of interest is institutional ownership (IOi,T),
which is defined as the percentage of shares held by institutional investors in stock i at the end of year T. We also include industry and
year dummies to control industry10 and year fixed effects. All regressions are estimated using pooled ordinary least squares (OLS)
with robust standard errors clustered by firm. The main coefficient of interest is α1, which is expected to be positive according to H1.
It is noteworthy that all the explanatory variables are lagged one year in the regression to help alleviate the reverse causality concern.
4. Sample and data
4.1. The sample
This study uses a sample of A-shares stocks from 2005 to 2016. Our sample starts from 2005 for two reasons. First, it was not until
2005 that institutional investors in China developed rapidly and became major players in the market. Second, split-share structure
reform (SSSR) in China started in May 2005.11 Our sample begins in 2005 to minimize the impact of this exogenous shock. In the
sample, we exclude: (1) financial service firms, (2) firms with fewer than 30 trading weeks of stock return data in a fiscal year, (3)
firms in the first year of listing, and (4) firm-year observation with missing value in control variables. Continuous variables are
winsorized at the 1 percent level in both tails to mitigate the effects of outliers. Since only mutual funds are obliged to disclose their
stock holdings and obtained completely, we use mutual funds as the proxy for institutional investors.12 We believe mutual funds are
representative of China’s institutional investors. The reasons are as follows. First, mutual funds account for the majority of the market
value of institutional investors holdings in China. For example, the market value of shares hold by mutual funds, securities com-
panies, qualified foreign institutional investors (QFII), public pension funds, insurances and trusts are 175 billion yuan, 13 billion
yuan, 9 billion yuan, 8 billion yuan, 4 billion yuan and 1 billion yuan at the end of 2005, respectively. And, they are 1588 billion
yuan, 72 billion yuan, 119 billion yuan, 228 billion yuan, 660 billion yuan (after adjusted) and 35 billion yuan at the end of 2016,
respectively. Second, the trading strategy of other institutional investors may be similar to that of mutual funds. It follows because the
portfolios of other institutions may be actually managed by mutual funds managers in China. In particular, the management of
pension fund portfolios is mostly entrusted to mutual fund companies in A-shares market. Additionally, many investment managers of
private funds used to serve as mutual fund managers, making their trading philosophy similar to that of mutual funds. All the data is
collected from the China Stock Market and Accounting Research (CSMAR) database.
Table 1 shows the distribution of our sample firms cross industries and years. Consistent with Xu et al. (2014), the majority of our
sample is from the manufacturing sector, and the number of observations steadily increases during the sample period.
4.2. Descriptive statistics
Panel A of Table 2 shows descriptive statistics for the variables in our regressions. The mean values of crash risk measures of
10
Industry classification is per the guideline by China Securities Regulatory Commission (CSRC) published in 2012.
11
SSSR started on 2005-5-9. Our sample includes 2005 because the variables of crash risk forward for one year in our empirical model. In Section
4.2, we show that empirical results are still robust for sub-samples after 2005.
12
Stock holdings of other institutional investor are disclosed only if she is in the top 10 (tradable) shareholders list. Thus, her stock holdings
cannot be fully observed.
6
Table 1
Sample distribution.
Panel A: Industry distribution
A B C D E F G H I K L M N O R S
N 416 550 13986 840 543 1383 817 65 1010 1219 240 68 187 7 156 504
% 1.89 2.50 63.60 3.82 2.47 6.29 3.72 0.30 4.59 5.54 1.09 0.31 0.85 0.03 0.71 2.29
Panel B: Year distribution
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
N 1291 1276 1276 1392 1482 1575 1926 2224 2378 2352 2305 2514 21991
% 5.87 5.80 5.80 6.33 6.74 7.16 8.76 10.11 10.81 10.70 10.48 11.43 100.00
Panel A shows the distribution of sample firms across industries based on Guidance on Industry Categories of Listed Companies (2012) issued by CSRC,
where A = Agriculture, B = Mining, C = Manufacturing, D = Electricity, gas, and water, E = Building and construction, F = Wholesale and retail,
G = Transportation, storage and post, H = Accommodation and catering, I = Information transmission, software and information technology
services, K = Real estate, L = Leasing, M = Scientific research and technological services, N = Water, environmental protection, and public facility
management, O = Residential service, repair, and other services, R = Culture, sports and entertainment, S = Conglomerate.
Table 2
Descriptive statistics.
Panel A. Descriptive statistics
Variables Mean Median Std.Dev. 25% 75%
NCSKEWT+1 −0.1669 −0.1926 0.7757 −0.6780 0.3271

DUVOLT+1 −0.1508 −0.1765 0.6877 −0.6156 0.2899
IOT 2.4950 0.5900 3.9359 0.0000 3.4040
InstSellT 0.6762 0.0000 3.2967 −0.6400 0.9200
NCSKEWT −0.1301 −0.1538 0.7660 −0.6378 0.3572
LNSIZET 14.8012 14.7791 1.2306 14.0005 15.5770
ROET 0.0640 0.0705 0.1533 0.0258 0.1240
DTURNT −0.0245 0.0098 0.4231 −0.1971 0.2125
MTBT 3.7222 2.6937 3.5925 1.6985 4.4644
LEVT 0.4750 0.4798 0.2184 0.3098 0.6322
KURTT 3.9355 3.5262 0.0067 2.9948 3.0030
RETT −0.0010 −0.0011 0.0067 −0.0052 0.0030
SIGMAT 0.0523 0.0510 0.0159 0.0409 0.0622
ABACCT 0.0846 0.0640 0.0769 0.0295 0.1162
IDIOT 0.1276 0.0852 0.6296 −0.4087 0.6115
#TransT 7.6357 2.0000 13.1358 0.0000 9.0000
HerfTransT −0.5196 −0.3829 0.3995 −1.0000 −0.1293
Panel B. Correlation matrix
A B C D E F G H I J K L M N O P
NCSKEWT+1 A 1.00
DUVOLT+1 B 0.91 1.00
IOT C 0.09 0.09 1.00
InstSellT D 0.04 0.01 −0.38 1.00
NCSKEWT E −0.04 −0.03 −0.02 0.14 1.00
LNSIZET F −0.05 −0.02 0.21 0.04 −0.09 1.00
ROET G 0.02 0.03 0.25 0.00 −0.07 0.23 1.00
DTURNT H −0.01 −0.00 −0.05 −0.01 −0.06 0.16 −0.04 1.00
MTBT I 0.05 0.05 0.14 −0.09 −0.03 0.14 −0.08 0.10 1.00
LEVT J −0.07 −0.07 −0.05 −0.00 −0.05 0.03 −0.18 0.11 0.01 1.00
KURTT K −0.02 −0.01 −0.14 0.02 −0.11 0.02 −0.06 −0.04 −0.14 0.02 1.00
RETT L 0.10 0.09 0.17 −0.25 −0.57 0.13 0.12 0.03 0.21 −0.02 −0.08 1.00
SIGMAT M 0.02 0.00 0.10 −0.12 −0.04 0.02 −0.05 0.29 0.42 −0.01 −0.21 0.21 1.00
ABACCT N 0.01 −0.00 0.02 −0.02 −0.02 −0.05 −0.09 0.02 0.04 0.23 −0.04 0.00 0.06 1.00
IDIOT O 0.04 0.03 0.02 −0.09 −0.12 −0.09 −0.01 0.09 0.20 0.00 0.11 0.07 0.25 0.01 1.00
#TransT P 0.04 0.06 0.22 0.03 0.00 0.63 0.21 0.10 0.13 −0.04 −0.04 0.09 0.09 −0.06 −0.06 1.00
HerfTransT Q 0.06 0.08 0.48 −0.06 0.00 0.66 0.28 0.01 0.06 −0.09 −0.02 0.12 −0.01 −0.06 −0.07 0.57
This table exhibits descriptive statistics of key variables in our study. The sample covers firm-year observations with non-missing values for control
variables for the period 2005–2016 with a total observation of 18738. All variables are defined in Appendix A.
7
Table 3
Impact of institutional ownership on crash risk.
(1) (2) (3) (4) (5) (6)
NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1
IOT 0.0145⁎⁎⁎ 0.0100⁎⁎⁎ 0.0146⁎⁎⁎ 0.0101⁎⁎⁎ 0.0159⁎⁎⁎ 0.0111⁎⁎⁎

(10.45) (8.01) (10.51) (8.06) (11.31) (8.84)
NCSKEWT 0.0444⁎⁎⁎ 0.0272⁎⁎⁎ 0.0391⁎⁎⁎ 0.0241⁎⁎⁎ 0.0375⁎⁎⁎ 0.0228⁎⁎⁎
(4.71) (3.30) (4.19) (2.95) (4.01) (2.78)
ABACCT −0.0334 −0.0779 −0.0215 −0.0711 0.0156 −0.0396
(−0.47) (−1.21) (−0.30) (−1.11) (0.22) (−0.62)
ROET −0.0414 −0.0546 −0.0293 −0.0477 −0.0363 −0.0536
(−1.11) (−1.58) (−0.79) (−1.38) (−0.96) (−1.54)
MTBT 0.0117⁎⁎⁎ 0.0083⁎⁎⁎ 0.0129⁎⁎⁎ 0.0090⁎⁎⁎ 0.0170⁎⁎⁎ 0.0124⁎⁎⁎
(6.70) (5.51) (7.45) (6.02) (9.86) (8.44)
LEVT −0.1361⁎⁎⁎ −0.1433⁎⁎⁎ −0.1314⁎⁎⁎ −0.1406⁎⁎⁎ −0.1311⁎⁎⁎ −0.1404⁎⁎⁎
(−5.22) (−6.41) (−5.01) (−6.27) (−4.93) (−6.20)
DTURNT −0.0942⁎⁎⁎ −0.0834⁎⁎⁎ −0.0940⁎⁎⁎ −0.0832⁎⁎⁎ −0.0692⁎⁎⁎ −0.0622⁎⁎⁎
(−5.84) (−5.98) (−5.82) (−5.97) (−4.34) (−4.52)
LNSIZET 0.0216⁎⁎⁎ 0.0387⁎⁎⁎ 0.0193⁎⁎⁎ 0.0374⁎⁎⁎ 0.0059 0.0260⁎⁎⁎
(3.45) (6.93) (3.07) (6.68) (0.95) (4.69)
KURTT −0.0237⁎⁎⁎ −0.0180⁎⁎⁎ −0.0219⁎⁎⁎ −0.0169⁎⁎⁎ −0.0237⁎⁎⁎ −0.0185⁎⁎⁎
(−6.04) (−5.36) (−5.58) (−5.06) (−6.04) (−5.53)
RETT 10.2523⁎⁎⁎ 8.6024⁎⁎⁎ 9.9230⁎⁎⁎ 8.4133⁎⁎⁎ 11.8910⁎⁎⁎ 10.0805⁎⁎⁎
(9.24) (8.58) (8.94) (8.40) (10.90) (10.27)
SIGMAT 3.2331⁎⁎⁎ 3.0628⁎⁎⁎ 4.4199⁎⁎⁎ 3.7445⁎⁎⁎
(6.17) (6.64) (9.30) (9.02)
IDIOT 0.0454⁎⁎⁎ 0.0261⁎⁎⁎
(5.00) (3.25)
Constant −0.2707⁎⁎⁎ −0.4328⁎⁎⁎ −0.3084⁎⁎⁎ −0.4544⁎⁎⁎ 0.0585 −0.1436⁎
(−2.78) (−5.01) (−3.16) (−5.27) (0.65) (−1.79)
R2 0.1425 0.1365 0.1414 0.1360 0.1376 0.1325
Obs. 18,738 18,738 18,738 18,738 18,738 18,738
This table presents estimation results of the impact of institutional ownership on crash risk following Eq. (6). Industry and year fixed effects are
included in all regressions. The sample covers firm-year observations with non-missing values for all variables for the period 2005–2016 with a total
observation of 18738. T-statistics is reported in parentheses based on White standard errors corrected for clustering by firm. ⁎, ⁎⁎, and ⁎⁎⁎ indicate
statistical significance at the 10%, 5%, and 1% levels, respectively. All variables are defined in Appendix A.
NCSKEWT+1 and DUVOLT+1 are −0.1669 and −0.1508, which are larger than Xu et al. (2014) and are comparable to Chen et al.
(2001) and Callen and Fang (2015b), suggesting that on average stocks in our sample are more prone to crash than those in Xu et al.
(2014). The means and median of IOT are 2.4950 and 0.5900, respectively. It means that institutional investors mainly hold small
percentage of firm’s shares, which then supports our view that institutional investors in A-shares market are impossible to win in a
proxy fight.
Panel B of Table 2 shows Person correlation matrix for the variables in our regressions. The correlation coefficient of NCSKEWT+1
and DUVOLT+1 is 0.91, indicating that both measures provide very similar indication of crash risk. This is comparable to the cor-
relation coefficient reported in Chen et al. (2001) and Callen and Fang (2013).
5. Empirical results
5.1. Results of institutional ownership on crash risk
Results of the basic regression Eq. (6) are reported in Table 3, where firm-specific crash risk is measured by NCSKEWT+1 and
DUVOLT+1. For both firm-specific crash risk measures, the estimated coefficients of IOT are significantly positive at 1 percent sig-
nificant level. These results provide supporting evidence for hypothesis H1 that institutional ownership is positively associated with
stock price crash risk, suggesting that institutional ownership exacerbates stock price crash risk as selling pressure increases through
institutional investors’ exit in response to firm’s bad news.
Further, following Hutton et al. (2009) and Callen and Fang (2015b), we examine the economic significance of the results by
setting IOT to its 25th and 75th percentile values, respectively, and comparing the incremental crash risk with their mean values. With
the models as in columns (1) and (2) in Table 3, when IOT shifts from its 25th to 75th percentile, NCSKEWT+1 and DUVOLT+1 increase
by 29.57 percent and 22.57 percent of their respective sample means. Evidently the impact of institutional ownership on crash risk is
not trivial, as its magnitude is much bigger than the average impact of accrual manipulation on alternative measures of crash risk at
7.72 percent as reported in Callen and Fang (2015b).
Chen et al. (2015) and Kim et al. (2019) document short-term institutional investors lead to managerial myopia. Also, prior
literature (Hutton et al., 2009; Kim et al., 2011a, 2011b; Callen and Fang, 2013, 2015a, 2015b) suggests that managerial myopia
8
exacerbates crash risk. Thus, we explicitly control for ABACCT to make sure that the positive relation between institutional ownership
and crash risk is not simply driven by managerial myopia. Similar to Xu et al. (2014), ABACCT is insignificant in all regressions in
Table 3. Additionally, unreported robustness results show that the regression results of IOT are very similar, even when we exclude
ABACCT from the regression equation. The significance of IOT in Table 3 suggests that the positive relation between institutional
ownership and crash risk is not simply driven by managerial myopia in the A-shares market. This is consistent with our view (though
indirectly) that institutional investors have little influence on management in China, as listed company is highly controlled by sole
majority shareholder in A-shares market and managers have little incentive to cater for institutional investors’ short-termism.
The effects of control variables are largely consistent with previous literature. Consistent with prior findings (Chen et al., 2001;
Hutton et al., 2009; Kim et al., 2011a, 2011b; Xu et al., 2014; Callen and Fang, 2013, 2015a, 2015b), MTBT, LNSIZET, RETT, SIGMAT,
and IDIOT are all positively correlated with future crash risk, and KURTT is negatively related to crash risk. Comparable to Kim et al.
(2011a, 2011b), the positive coefficients on NCSKEWT indicate that crash risk is positively autocorrelated over time. Similar to Xu
et al. (2014), ROET is insignificant in our results. Quite surprisingly, contrary to the heterogeneous beliefs theory (Hong and Stein,
2003), DTURNT, the proxy of differences of opinion, is negatively related with future crash risk. This suggests that, when other factors
are controlled, increasing turnover may facilitate information exchange so that reduce price crash risk in Chinese stock market. Xu
et al. (2014), a prior study on A-share crash risk, also report mostly negative yet insignificant relation between DTURNT and crash
risk.
5.2. Robustness checks
5.2.1. Different control variables

We conduct a series of robustness checks on the main results. Columns (3)–(6) in Table 3 report the estimation results with
different combinations of control variables. We note that the estimated coefficient of IOT is numerically stable and always significant
at 1percent level.
5.2.2. Alternative measure of firm-specific crash risk

The similarity between Columns (1) and (2) in Table 3, which use NCSKEWT+1 and DUVOLT+1 as the respective crash risk
measures, reflects the robustness of the results. To further improve the robustness, we consider a third measure on crash risk
CRASHT+1 as employed by Kim et al. (2011a, 2011b). When a firm-specific weekly return Wi,t in Eq. (2) is lower than a threshold, the
week is labeled as a crash week. The threshold is defined as average weekly return during year T minus 3.2 times its standard
deviation. If there is at least one crash week for stock i during year T, the dummy variable CRASHi,T equals one, and zero in the
absence of any crash week. As a dummy variable, CRASHi,T does not capture the magnitude of a crash, and its definition is somewhat
arbitrary. For example, Hutton et al. (2009) define the threshold as 3.09 times standard deviation below weekly average return. Due
to such shortcomings of CRASHT, recent studies usually choose NCSKEWT and DUVOLT as crash risk measures. Nevertheless, we
conduct OLS and Logit regressions with CRASHi,T+1 similar to the model specification in Eq. (6) as a robustness check. In Panel A of
Table 4 the coefficient of IOT is positive and significant at 1 percent. The results on control variables are very similar to those in
Table 3, and thus are unreported for brevity. The same reporting practice on control variables also applies in the following robustness
checks for H1.
5.2.3. Exclusion on manufacturing sector

Although industry fixed effect in Table 3 has controlled industrial heterogeneity, we perform additional test to deal the concern of
unevenly sample distribution. As showed in Table 1, the manufacturing sector accounts for 63.60 percent of the sample. Thus, our
results may be biased due to the high proportion of this sector in the sample. We exclude the manufacturing sector and re-estimate Eq.
(6). The results are showed in Panel B of Table 4. The coefficient of IOT is still positively significant at 1 percent. The results are
consistent with those in Table 3, suggesting our results are not biased due to unevenly sample distribution.
5.2.4. Endogeneity
In our analysis, endogeneity is a potential concern. One source of endogeneity is reverse causality. For example, institutional
investors may self-select into crashed stocks as their bad news has been priced in and the prices are low and attractive. However, all
the explanatory variables are lagged one year in our regressions to alleviate the reverse causality. In addition, we use the revision of
the fair trading system for fund companies in 2011 as an exogenous shock to deal with the concern of the reverse causality. In 2011,
CSRC revised the fair trading system for fund companies (FTSFC). According to this revision, it is forbidden for fund companies’
investment committees and investment directors to interfere with investment activities of portfolio managers within the scope of their
authorization. As this revision improves the autonomy of fund managers, the selling pressure of institutional investors’ exit in
response to firm’s bad news is heavier after this revision. If institutional ownership increases crash risk through institutional selling
pressure, we expect the positive relation between institutional ownership and crash risk should be more pronounced after 2011.
We test this prediction and show the results in Panel C of Table 4. The results show that IOT is positive and significant at 1 percent,
supporting hypothesis H1. In addition, the coefficient of IOT is larger during period 2012–2016, which is in line with our conjecture
that the FTSFC in 2011 increases institutional selling pressure on firm’s bad news and hence strengthens the relation between
institutional ownership and crash risk.
Endogeneity may also arises when an exogenous variable (e.g., an omitted or unobservable firm characteristic) may affect both
institutional ownership and price crash risk, causing a pseudo association between the two variables. To address this concern, we re-
9
Table 4
Robustness checks.
Panel A. Alternative measure on firm-specific crash risk
OLS Logit
CRASHT+1 CRASHT+1
IOT 0.0028 ⁎⁎⁎

0.0282⁎⁎⁎
(3.97) (4.18)
R2/(Pseudo R2) 0.0654 (0.0898)
Obs. 18,738 18,738
Panel B. Exclusion on manufacturing sector
(1) (2)
NCSKEWT+1 DUVOLT+1
IOT 0.0142 ⁎⁎⁎

0.0088⁎⁎⁎
(6.22) (4.10)
R2 0.1268 0.1084
Obs. 6,898 6,898
Panel C. Different subsample periods
Sample period 2006–2016 2006–2016 2005–2010 2005–2010 2012–2016 2012–2016
NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1
IOT 0.0169 ⁎⁎⁎

0.0122 ⁎⁎⁎
0.0117 ⁎⁎⁎
0.0062⁎⁎⁎
0.0178 ⁎⁎⁎
0.0146⁎⁎⁎
(11.82) (9.58) (6.39) (3.64) (7.48) (6.85)
R2 0.1491 0.1413 0.1156 0.1270 0.1726 0.1621
Obs. 17,488 17,488 6,508 6,508 10,679 10,679
Panel D. Estimation results of dual fixed effects model and change-in-variable model
(1) (2) (3) (4)
OLS OLS Change-in-variable Change-in-variable
NCKSEWT+1 DUVOLT+1 △NCKSEWT+1 △DUVOLT+1
IOT 0.0089 ⁎⁎⁎

0.0040 ⁎⁎⁎
(4.50) (2.30)
△IOT 0.0126⁎⁎⁎ 0.0089⁎⁎⁎
(5.69) (4.39)
Firm Yes Yes
Industry Yes Yes
Year Yes Yes Yes Yes
R2 0.0556 0.0540 0.3648 0.3609
Obs. 18,738 18,738 15,964 15,964
(continued on next page)
10
Table 4 (continued)
Panel E. Instrumental variable approach
2SLS 2SLS
NCSKEWT+1 DUVOLT+1
IOT 0.0500 ⁎⁎⁎

0.0427⁎⁎⁎
(3.25) (3.19)
R2 0.1241 0.1112
Obs. 15,963 15,963
Panel A of this table reports the regression estimation results, based on an alternative firm-specific crash risk measure. Panel B reports
the results, excluding the manufacturing sector. Panel C reports the results, using different sample periods. Panel D reports the results,
using the dual fixed model and change-in-variable model. Column (1) and (2) of this panel report the estimation results for the re-
gression model with firm and year fixed effects. Column (3) and (4) of this panel report the estimation results for change-in-variable
model. Panel E reports the results of instrument variable approach. The control variables in all regressions are the same as those in
columns (1) and (2) in Table 3, and results of control variables are elided for brevity. Industry and year fixed effects are also controlled in
all regressions except column (1) and (2) in Panel D. T-statistics reported in parentheses are based on White standard errors corrected for
clustering by firm. ⁎, ⁎⁎, and ⁎⁎⁎ indicate statistical significance at the 10%, 5%, and 1% levels, respectively. All variables are defined in
Appendix A.
run Regression (6) with firm-year dual fixed effects, and present the results in columns (1) and (2) in Panel D of Table 4. Consistent
with hypothesis H1, the coefficient on IOT is positive and significant at the 1 percent level.
The firm-year dual fixed effects model deals with the potential influence of omitted variables, but our model may still be subject to
spurious correlation. Chung et al. (2010) and An and Zhang (2013) points out that change-in-variable models are less subject to
spurious correlations and furnish more rigorous tests of causal relations. We regress change-in-variable model, in which the change in
crash risk is regressed on the lagged change in institutional ownership and the changes in control variables. The results are showed in
column (3) and (4) in Panel D of Table 4. Consistent with H1, the coefficient on IOT is positive and significant at the 1 percent level.
In order to reinforce the causal relation between institutional ownership and crash risk, we also employ an instrumental variable
two-stage least squares (2SLS) approach to deal with the potential endogeneity. As documented in Callen and Fang (2013), variables
referring to institutional investors’ preference are appropriate as instruments. Our instruments are based on Callen and Fang (2013),
and Cao et al. (2017). In particular, our instruments include an indicator variable for the HS300 index stocks (HS300), which equals
to 1 for stocks that belong to the HS300 index, to control for institutional preference for stocks listed in this index. Dividend yield
(DIV) controls for dividends preference. Momentum (MOM), which is defined as the stock return over the previous 12 months,
controls for institutional preference for momentum.
In the first stage, we regress IOT on the above instrumental variables and exogenous exploratory variables. All these instrumental
variables are lagged for one period relative to IOT. In the second stage, we re-regress our basic model after replacing IOT by the fitted values
from the first stage regression. Our instruments may suffer from concerns of weak instrument and endogenous instrument. The results for
the first-stage regressions show that the estimated coefficients of instruments and the F-statistics are highly significant.13 Thus, our model
does not suffer from the concern of weak instrument. To deal with the concern of endogenous instrument, we perform the test of
overidentifying restrictions. This test regress the residual of the 2SLS model on exogenous exploratory variables and all instruments. If the
instruments are truly exogenous, the coefficients of the instruments will be equal to zero. The chi-square of the overidentifying restrictions
for NCSKEW and DUVOL are insignificant (4.2752 and 3.070, respectively),14 suggesting that our model does not suffer from the en-
dogenous instrument concern. The results of the second-stage regressions are exhibited in Panel E of Table 4. The results of control
variables are similar and omitted for brevity. Consistent with our primary results, the coefficients of IOT are significant at 1 percent level
with positive sign across all columns, suggesting the causal relation between institutional ownership and crash risk.
5.3. Additional evidence for selling pressure
As discussed in Section 2, the negative role of institutional ownership on crash risk stems from the practical dilemma that
institutional investors in the A-shares market usually hold too small stake to voice and so they are forced to exit. To see if this is true,
we split the samples into two groups according to whether firm has actual controller and re-estimate Eq. (6). If our argument is true,
the positive relation of institutional ownership and crash risk should be more significant for firm with actual controller. It follows
because institutional investors are more impossible to voice in firm with actual controller. The results of NCSKEWT+1 (DUVOLT+1)
for firms with actual controllers and without actual controllers are showed in column (1) and (2) in Panel A (Panel B) of Table 5,
respectively. Consistent with our expectation, the coefficients of IOT are significant at 1 percent level only for firms with actual
controllers. It implies that the negative role of institutional ownership on crash risk roots in firm’s highly concentrated ownership
structure in A-shares market.
13
The F-statistics is 185.39 and significant at 1% level.
14
The corresponding P-value is 0.12 and 0.22, respectively.
11
Table 5
Mechanism of institutional ownership on crash risk.
Panel A. Analysis on future crash risk (NCSKEWT+1)
(1) (2) (3) (4) (5) (6)
NCSKEWT+1 NCSKEWT+1 InstSellT+1 NCSKEWT+1 NCSKEWT+1 NCSKEWT+1
InstSellT 0.0305⁎⁎⁎
(19.02)
IOT 0.0146 ⁎⁎⁎
0.0152 ⁎
0.3762 ⁎⁎⁎
0.0030⁎⁎ 0.0122⁎⁎⁎ 0.0055⁎⁎
(10.28) (1.85) (32.09) (2.04) (5.91) (2.10)
NCSKEWT 0.0427⁎⁎⁎ 0.0714 −0.0336 0.0454⁎⁎⁎ 0.0466⁎⁎⁎ 0.0362⁎⁎
(4.44) (1.42) (−1.02) (4.84) (2.84) (2.41)
ABACCT −0.0360 0.1271 −0.4635 −0.0193 −0.0337 −0.0794
(−0.50) (0.25) (−1.58) (−0.27) (−0.27) (−0.66)
ROET −0.0374 −0.3171 −1.3174⁎⁎⁎ −0.0012 −0.0056 0.2047⁎⁎⁎
(−1.01) (−0.96) (−9.87) (−0.03) (−0.07) (2.87)
MTBT 0.0117⁎⁎⁎ 0.0108 −0.0129⁎⁎ 0.0121⁎⁎⁎ 0.0166⁎⁎⁎ 0.0146⁎⁎⁎
(6.63) (0.88) (−2.20) (6.92) (5.02) (4.12)
LEVT −0.1333⁎⁎⁎ −0.1650 0.2736⁎⁎⁎ −0.1444⁎⁎⁎ −0.2183⁎⁎⁎ −0.1924⁎⁎⁎
(−5.07) (−0.80) (2.83) (−5.56) (−4.40) (−4.03)
DTURNT −0.0943⁎⁎⁎ −0.0863 0.1022 −0.0973⁎⁎⁎ −0.1059⁎⁎⁎ −0.0810⁎⁎⁎
(−5.77) (−0.83) (1.60) (−6.09) (−3.82) (−3.30)
LNSIZET 0.0216⁎⁎⁎ 0.0146 0.0434⁎⁎ 0.0203⁎⁎⁎ 0.0453⁎⁎⁎ 0.0085
(3.36) (0.40) (2.02) (3.23) (4.19) (0.77)
KURTT −0.0232⁎⁎⁎ −0.0285 −0.0200 −0.0231⁎⁎⁎ −0.0139⁎⁎ −0.0277⁎⁎⁎
(−5.80) (−1.11) (−1.56) (−5.91) (−2.20) (−4.29)
RETT 10.1753⁎⁎⁎ 12.6993⁎⁎ −11.5633⁎⁎ 10.6053⁎⁎⁎ 11.5900⁎⁎⁎ 11.3637⁎⁎⁎
(8.98) (2.19) (−2.52) (9.66) (6.42) (6.36)
SIGMAT 3.2177⁎⁎⁎ 3.9100 6.7274⁎⁎⁎ 3.0277⁎⁎⁎ 2.0031⁎⁎ 2.5460⁎⁎⁎
(6.05) (1.25) (3.23) (5.80) (2.30) (2.79)
IDIOT 0.0445⁎⁎⁎ 0.0786 −0.0358 0.0465⁎⁎⁎ 0.0432⁎⁎⁎ 0.0445⁎⁎⁎
(4.81) (1.45) (−1.02) (5.12) (2.77) (3.01)
Constant −0.2780⁎⁎⁎ 0.3377 −2.4318⁎⁎⁎ −0.1964⁎⁎ −0.5381⁎⁎⁎ −0.3822⁎⁎
(−2.80) (0.54) (−6.99) (−2.02) (−3.28) (−2.29)
R2 0.1433 0.1701 0.2157 0.1545 0.1298 0.1597
Obs. 18,213 525 18,738 18,738 7,313 6,540
Panel B. Analysis on future crash risk (DUVOLT+1)
(1) (2) (3) (4) (5) (6)
DUVOLT+1 DUVOLT+1 InstSellT+1 DUVOLT+1 DUVOLT+1 DUVOLT+1
InstSellT 0.0368⁎⁎⁎
(24.52)
IOT 0.0099⁎⁎⁎ 0.0136⁎⁎ 0.3762⁎⁎⁎ −0.0039⁎⁎⁎ 0.0077⁎⁎⁎ −0.0005
(7.76) (2.00) (32.09) (−2.94) (4.26) (−0.22)
NCSKEWT 0.0280⁎⁎⁎ −0.0134 −0.0336 0.0284⁎⁎⁎ 0.0306⁎⁎ 0.0222⁎
(3.34) (−0.32) (−1.02) (3.48) (2.20) (1.69)
ABACCT −0.0801 0.1222 −0.4635 −0.0609 −1.773 −0.0748
(−1.23) (0.28) (−1.58) (−0.96) (−1.57) (−0.71)
ROET −0.0488 −0.3758 −1.3174⁎⁎⁎ −0.0061 0.0348 0.1863⁎⁎⁎
(−1.41) (−1.36) (−9.87) (−0.18) (0.60) (2.95)
MTBT 0.0083⁎⁎⁎ 0.0096 −0.0129⁎⁎ 0.0087⁎⁎⁎ 0.0126⁎⁎⁎ 0.0123⁎⁎⁎
(5.45) (0.93) (−2.20) (5.77) (4.21) (3.77)
LEVT −0.1392⁎⁎⁎ −0.2449 0.2736⁎⁎⁎ −0.1534⁎⁎⁎ −0.2029⁎⁎⁎ −0.1820⁎⁎⁎
(−6.16) (−1.40) (2.83) (−6.86) (−4.74) (−4.42)
DTURNT −0.0813⁎⁎⁎ −0.1503⁎ 0.1022 −0.0871⁎⁎⁎ −0.0863⁎⁎⁎ −0.0826⁎⁎⁎
(−5.75) (−1.73) (1.60) (−6.33) (−3.58) (−3.73)
LNSIZET 0.0391⁎⁎⁎ 0.0283 0.0434⁎⁎ 0.0371⁎⁎⁎ 0.0567⁎⁎⁎ 0.0311⁎⁎⁎
(6.86) (0.84) (2.02) (6.60) (5.75) (3.19)
KURTT −0.0175⁎⁎⁎ −0.0296 −0.0200 −0.0172⁎⁎⁎ −0.0108⁎ −0.0199⁎⁎⁎
(−5.10) (−1.46) (−1.56) (−5.19) (−1.96) (−3.70)
RET 8.7881⁎⁎⁎ 4.6121 −11.5633⁎⁎ 9.0280⁎⁎⁎ 9.9107⁎⁎⁎ 9.8138⁎⁎⁎
(8.59) (0.96) (−2.52) (9.17) (6.23) (6.09)
SIGMAT 3.0955⁎⁎⁎ 2.1175 6.7274⁎⁎⁎ 2.8151⁎⁎⁎ 1.7513⁎⁎ 2.7506⁎⁎⁎
(6.58) (0.91) (3.23) (6.15) (2.23) (3.43)
IDIOT 0.0242⁎⁎⁎ 0.0826⁎ −0.0358 0.0274⁎⁎⁎ 0.0247⁎ 0.0263⁎⁎
(2.96) (1.78) (−1.02) (3.43) (1.79) (2.01)
(continued on next page)
12
Table 5 (continued)
Panel B. Analysis on future crash risk (DUVOLT+1)
(1) (2) (3) (4) (5) (6)
DUVOLT+1 DUVOLT+1 InstSellT+1 DUVOLT+1 DUVOLT+1 DUVOLT+1
Constant −0.4475 ⁎⁎⁎

0.2553 −2.4318 ⁎⁎⁎
−0.3433
⁎⁎⁎
−0.5553 ⁎⁎⁎
−0.6651⁎⁎⁎
(−5.11) (0.45) (−6.99) (−3.98) (−3.81) (−4.44)
R2 0.1369 0.1792 0.2157 0.1592 0.1237 0.1557
Obs. 18,213 525 18,738 18,738 7,313 6,540
This table presents estimation results for the regressions detecting the mechanism of institutional ownership on crash risk. Industry and year fixed
effects are included in all regressions. Panel A and Panel B show the results of NCSKEWT+1 and DUVOLT+1, respectively. Column (1) shows the
results of firms with actual controllers. Column (2) shows the results of firms without actual controllers. Column (3) exhibits the results of Eq. (7).
Column (4) exhibits the results of Eq. (8). Column (5) exhibits the results of sub-sample with positive InstSellT+1. Column (6) exhibits the results of
sub-sample with negative InstSellT+1. The sample covers firm-year observations with non-missing values for all variables for the period from 2005 to
2016. T-statistics reported in parentheses are based on White standard errors corrected for clustering by firm. ⁎, ⁎⁎, and ⁎⁎⁎ indicate statistical
significance at the 10%, 5%, and 1% levels, respectively. All variables are defined in Appendix A.
Additionally, the major explanation for the main finding in Table 3 is that higher institutional ownership can facilitate heavier
selling pressure of institutional exit in response to firm’s bad news, which in turn increase stock price crash risk. To see whether this is
the case, we perform a set of tests.
First, we run the following regression:
InstSelli, T + 1 = 0 + 1 IOi, T + 2 Controlk i, T + µi, T

k (7)
where InstSelli,T+1 is our proxy for selling pressure of institutional exit, measured as the negative value of the first order difference of
IOT+1. The larger InstSelli,T+1 is, the larger percentage of firm i’s share is sold by institutional investors in year T+1, which means
more selling pressure of institutional exit. Column (3) in Table 5 reports the results. It is evident that institutional ownership is
positively related to subsequent institutional selling pressure. It appears that high institutional ownership induces more institutional
selling pressure of institutional exit, suggesting that institutional investors may not trade independently of each other and co-selling
behavior increases their selling pressure.
We then further test whether institutional selling pressure leads to great crash risk by conducting Regression (8). As shown in
column (4) of Panel A and Panel B in Table 5, the coefficient of InstSellT is significantly positive and the coefficient of IOT is smaller
than that in Table 3 both for NCSKEWT+1 and DUVOLT+1. These results show that the effect of institutional ownership and crash risk
is mediated by institutional selling pressure in response to firm’s bad news.
CrashRiski, T + 1 = 0 + 1 InstSelli, T + 1 + 2 IOi, T

k
+ k Controlsi, T + IndustryDummies + YearDummies + µi, T .
k (8)
Second, we split the full sample into two sub-samples, based on InstSellT, and estimate Eq. (6) with each sub-sample separately.
The first group consists of stocks with positive InstSellT, the second group consists of stocks with negative InstSellT. The result of
NCKSEWT+1 (DUVOLT+1) for each group is showed in column (5) and (6) in Panel A (Panel B) in Table 5, respectively. The positive
coefficient of IOT is more pronounced in column (5) than that in column (6). It suggests that institutional selling pressure strengthens
the positive relation between institutional ownership and crash risk. Thus, institutional selling pressure amplifies financial market
response to firm’s bad news and hence exacerbates crash risk.
To summarize, the collective evidences clearly demonstrate the effect mechanism through which institutional ownership induces
great stock price crash risk. Specifically, institutional investors may not trade independently of each other and would co-sell stocks in
response to firm’s bad news. When institutional ownership is higher, such co-selling behavior increases institutional selling pressure,
which amplifies market response to firm’s bad news and thus elevates its crash risk.
5.4. Institutional investors characteristics and crash risk
5.4.1. Classification of Institutional investors

To test H2, we first need to identify the classification of institutional investors. We obtain the classification of institutional
investors following the procedure discussed in Section 3.2. We show the results in Table 6.
Panel A of Table 6 exhibits the results of common factors, which are produced by the principle components analysis.15 The BLOCK
factor captures the degree of holding concentration. Institutional investor with higher BLOCK score hold more concentrated portfolio.
15
The number of factors is determined by three criteria: scree plots, minimum eigenvalue, and proportion of variance explained. All these criteria
produce consistent results.
13
Table 6
Classification of institutional investors.
Panel A. Principle components analysis
Variable Factors
BLOCK PTURN
APH 0.97 0.08

LBPH 0.84 0.22
HERF 0.73 −0.09
CONC 0.62 −0.20
PT 0.16 0.93
STAB 0.12 −0.45
Var. Explained 70% 30%
Panel B. Cluster analysis based on factor scores
Cluster N Factor scores mean
BLOCK PTURN
Transient 9595 −0.4043 0.7754

Quasi-Indexers 5911 −0.2820 −0.6940
Dedicated 2984 1.1960 −1.0821
Informed-Dedicated 539 3.6686 −0.2013
Panel C. Persistence of cluster membership across time
Percentage in Cluster-year T + 1
Cluster-year T Transient Quasi-Indexers Dedicated Informed-Dedicated
Transient 74.76 21.77 2.76 0.71

Quasi-Indexers 20.87 72.29 6.54 0.29
Dedicated 5.99 16.44 71.64 5.92
Informed-Dedicated 6.60 2.52 48.35 42.52
Panel D. Crosstabs of institutional types
Legal N Cluster analysis
Transient Quasi-Indexers Dedicated Informed-Dedicated
Active 179 37.99% 40.22% 17.88% 3.91%

Index 1533 19.18% 76.19% 4.31% 0.33%
Comprehensive 17250 53.36% 26.90% 16.70% 3.04%
Panel A of this table reports the results of classification of institutional investors. Factors are estimated using principle components analysis with an
oblique promax rotation. All variables are defined in Appendix A. Panel B of this table reports the k-mean cluster analysis based on factor scores that
are calculated based on Panel A. N represents the number of institution-year observations. Panel C of this table reports the persistence of cluster
membership across time. The number in Panel C represents the percentage of institutions in each year T cluster that are in each year T+1 cluster,
excluding institutions dropping out of the sample prior to year T+1. Panel D of this table exhibits the crosstabs of institutional types, showing the
percentage numbers of institutions in each legal institutional investor type that are in each classification based on cluster analysis. N represents the
number of institution-year observations of legal institutional investor types. The sum of numbers in each row is 100%.
The PTURN factor captures the degree of portfolio turnover. Institutional investor with higher PTURN score trades stocks more
frequently. The results in Panel A of Table 6 are comparable to Bushee (1998), which implies the reasonability of our principle
components analysis.
Panel B of Table 6 exhibits the results of cluster analysis based on factor scores of each institutional investor. Our cluster solution
yields four groups: transient, quasi-indexers, dedicated, and informed-dedicated. Transient institutions have the highest turnover and
the lowest concentration. Dedicated institutions have the second highest concentration and the lowest turnover. Quasi-indexers
institutions exhibit low concentration and low turnover, which are accord with index-type, buy-and-hold strategies. The char-
acteristics of these three groups are consistent with Bushee (1998). Compared with Bushee (1998), we have one more group of
informed-dedicated. Informed-dedicated institutions have the highest concentration and relatively high turnover, which imply they
hold concentrated portfolios about which they have inside news, and trade aggressively to make profits. Due to the imperfection of
the legal system in A-shares market (Jiang and Kim, 2015), various methods and tactics of market value management are often
14
Table 7
Institutional types and crash risk.
(1) (2) (3) (4) (5) (6)
NCSKEWT+1 NCSKEWT+1 NCSKEWT+1 NCSKEWT+1 NCSKEWT+1 NCSKEWT+1
TransIOT 1.8131⁎⁎⁎ 1.8096⁎⁎⁎ 2.4646⁎⁎⁎ 2.6354⁎⁎⁎

(5.82) (5.81) (8.31) (9.07)
DediIOT 0.6234⁎⁎⁎ 0.6155⁎⁎⁎ 0.8260⁎⁎⁎
(6.28) (6.88) (9.98)
InformIOT −0.0314 0.3821⁎⁎⁎ 0.6671⁎⁎⁎
(−0.20) (2.76) (4.88)
NCSKEWT 0.0424⁎⁎⁎ 0.0424⁎⁎⁎ 0.0467⁎⁎⁎ 0.0481⁎⁎⁎ 0.0441⁎⁎⁎ 0.0514⁎⁎⁎
(4.49) (4.49) (4.97) (5.11) (4.68) (5.49)
ABACCT −0.0502 −0.0505 −0.0343 −0.0268 −0.0522 −0.0301
(−0.70) (−0.71) (−0.48) (−0.37) (−0.73) (−0.42)
ROET −0.0562 −0.0564 −0.0256 −0.0178 −0.0490 0.0000
(−1.49) (−1.50) (−0.69) (−0.48) (−1.30) (0.00)
MTBT 0.0110⁎⁎⁎ 0.0110⁎⁎⁎ 0.0117⁎⁎⁎ 0.0119⁎⁎⁎ 0.0113⁎⁎⁎ 0.0124⁎⁎⁎
(6.35) (6.35) (6.67) (6.80) (6.48) (7.00)
LEVT −0.1269⁎⁎⁎ −0.1268⁎⁎⁎ −0.1327⁎⁎⁎ −0.1358⁎⁎⁎ −0.1324⁎⁎⁎ −0.1437⁎⁎⁎
(−4.88) (−4.88) (−5.08) (−5.20) (−5.10) (−5.48)
DTURNT −0.0846⁎⁎⁎ −0.0843⁎⁎⁎ −0.0867⁎⁎⁎ −0.0909⁎⁎⁎ −0.0915⁎⁎⁎ −0.0980⁎⁎⁎
(−5.20) (−5.22) (−5.33) (−5.64) (−5.66) (−6.01)
LNSIZET 0.0196⁎⁎⁎ 0.0196⁎⁎⁎ 0.0301⁎⁎⁎ 0.0329⁎⁎⁎ 0.0182⁎⁎⁎ 0.0330⁎⁎⁎
(3.01) (3.01) (4.81) (5.37) (2.80) (5.23)
KURTT −0.0233⁎⁎⁎ −0.0233⁎⁎⁎ −0.0237⁎⁎⁎ −0.0239⁎⁎⁎ −0.0240⁎⁎⁎ −0.0249⁎⁎⁎
(−5.94) (−5.94) (−6.04) (−6.08) (−6.11) (−6.36)
RETT 9.8093⁎⁎⁎ 9.7900⁎⁎⁎ 9.8150⁎⁎⁎ 10.0975⁎⁎⁎ 10.6810⁎⁎⁎ 11.1286⁎⁎⁎
(8.80) (8.79) (8.81) (9.09) (9.69) (10.10)
SIGMAT 3.1668⁎⁎⁎ 3.1655⁎⁎⁎ 3.1988⁎⁎⁎ 3.2237⁎⁎⁎ 3.3646⁎⁎⁎ 3.5153⁎⁎⁎
(6.05) (6.04) (6.09) (6.13) (6.43) (6.68)
IDIOT 0.0436⁎⁎⁎ 0.0435⁎⁎⁎ 0.0463⁎⁎⁎ 0.0471⁎⁎⁎ 0.0423⁎⁎⁎ 0.0456⁎⁎⁎
(4.82) (4.82) (5.11) (5.19) (4.66) (4.99)
Constant −0.2448⁎⁎ −0.2443⁎⁎ −0.3719⁎⁎⁎ −0.4020⁎⁎⁎ −0.2299⁎⁎ −0.4097⁎⁎⁎
(−2.46) (−2.46) (−3.81) (−4.17) (−2.31) (−4.17)
R2 0.1435 0.1435 0.1420 0.1417 0.1421 0.1392
Obs. 18,738 18,738 18,738 18,738 18,738 18,738
Column (1) of this table reports the result of Eq. (9). Column (2) – (6) of this table is also reported to test the robustness of the results. Industry and
year fixed effects are included in all regressions. The sample covers firm-year observations with non-missing values for all variables in period from
2005 to 2016 with a total observation of 18738. T-statistics reported in parentheses are based on White standard errors corrected for clustering by
firm. ⁎, ⁎⁎, and ⁎⁎⁎ indicate statistical significance at the 10%, 5%, and 1% levels, respectively. All variables are defined in Appendix A.
employed by listed companies to control or even manipulate share prices (Lin et al., 2019), and institutional investors may conspire
with management of listed company to make profits. Thus, it is reasonable to identify informed-dedicated institutions. The largest
class of institutional investors is transient, which is in line with the speculative characteristic of A-shares market.
Panel C of Table 6 shows the persistence of cluster membership across time. Over 70 percent of all classes of institutions, except
informed-dedicated, tend to maintain that classification one year later. Only approximately 42 percent of informed-dedicated in-
stitutions maintain that classification one year later, and approximately 48 percent of them transfer into dedicated institutions. Thus,
informed-dedicated institutions are more unstable than other classes of institutions. It is in line with the intuition that inside in-
formation are scarce, and informed-dedicated institutions without inside information would change into dedicated ones.
Panel D of Table 6 exhibits the crosstabs of institutional types based on our cluster analysis and legal classifications. The legal
institutional investor types in A-shares market consist of active type, index type, and comprehensive type.16 76.19 percent index type
institutions belong to quasi-indexers, implying the reasonability of our cluster analysis. In addition, 19.18 percent institutions who
state index strategies actually follow transient strategies. Moreover, strategies of active type and comprehensive type institutions are
actually ambiguous, because they all consist of more balanced percentage of classifications based on cluster analysis.
5.4.2. Moderate effects of institutional types

We estimate Eq. (9) to test hypothesis H2 that the positive relation between institutional ownership and crash risk is more (less)
pronounced for transient (dedicated) institutional investors. TransIOi,T, DediIOi,T, and InformIOi,T are institutional ownership of
transient, dedicated, and informed-dedicated institutions, respectively. We also include informed-dedicated ownership to clarify its
distinction from dedicated ownership. Due to advantage of inside information, informed-dedicated institutions are more capable to
time the market and more urgent to hide their private information, making their selling more secretly. Thus, we expect the effect of
informed-dedicated institutional ownership on crash risk is the weakest.
16
Data of legal institutional types are obtained from CSMAR database.
15
Table 8
Institutional investor competition and crash risk.
(1) (2) (3) (4)
NCSKEW_K NCSKEW_K NCSKEW_K NCSKEW_K
#InstT × IOT 0.0002⁎⁎⁎

(6.89)
#HerfInstT × IOT 0.0348⁎⁎⁎
(5.13)
#TransT × IOT 0.0006⁎⁎⁎
(5.50)
#HerfTransT × IOT 0.0230⁎⁎⁎
(6.08)
IOT 0.0052⁎⁎⁎ 0.0187⁎⁎⁎ 0.0080⁎⁎⁎ 0.0182⁎⁎⁎
(2.75) (11.67) (4.76) (11.79)
NCSKEWT 0.0412⁎⁎⁎ 0.0432⁎⁎⁎ 0.0425⁎⁎⁎ 0.0426⁎⁎⁎
(4.36) (4.58) (4.51) (4.52)
ABACCT −0.0394 −0.0375 −0.0276 −0.0372
(−0.55) (−0.53) (−0.39) (−0.52)
ROET −0.0579 −0.0461 −0.0510 −0.0443
(−1.55) (−1.24) (−1.37) (−1.19)
MTBT 0.0105⁎⁎⁎ 0.0113⁎⁎⁎ 0.0107⁎⁎⁎ 0.0114⁎⁎⁎
(6.07) (6.51) (6.16) (6.58)
LEVT −0.1352⁎⁎⁎ −0.1352⁎⁎⁎ −0.1365⁎⁎⁎ −0.1340⁎⁎⁎
(−5.21) (−5.19) (−5.25) (−5.15)
DTURNT −0.0969⁎⁎⁎ −0.0939⁎⁎⁎ −0.0941⁎⁎⁎ −0.0941⁎⁎⁎
(−6.01) (−5.82) (−5.85) (−5.84)
LNSIZET 0.0069 0.0169⁎⁎⁎ 0.0132⁎⁎ 0.0172⁎⁎⁎
(1.04) (2.67) (2.05) (2.73)
KURTT −0.0231⁎⁎⁎ −0.0238⁎⁎⁎ −0.0228⁎⁎⁎ −0.0238⁎⁎⁎
(−5.89) (−6.06) (−5.81) (−6.06)
RETT 10.4022⁎⁎⁎ 10.1832⁎⁎⁎ 10.0693⁎⁎⁎ 10.0898⁎⁎⁎
(9.40) (9.18) (9.08) (9.08)
SIGMAT 3.2283⁎⁎⁎ 3.2092⁎⁎⁎ 3.1001⁎⁎⁎ 3.1860⁎⁎⁎
(6.18) (6.13) (5.93) (6.09)
IDIOT 0.0428⁎⁎⁎ 0.0443⁎⁎⁎ 0.0451⁎⁎⁎ 0.0446⁎⁎⁎
(4.72) (4.88) (4.98) (4.93)
Constant −0.0681 −0.2021⁎⁎ −0.1478 −0.2042⁎⁎
(−0.67) (−2.06) (−1.49) (−2.09)
R2 0.1446 0.1432 0.1444 0.1435
Obs. 18,738 18,738 18,738 18,738
This table presents estimation results of Eq. (10). Different proxy for institutional investor competition is employed in each column. Industry and
year fixed effects are included in all regressions. The sample covers firm-year observations with non-missing values for all variables for the period
from 2005 to 2016 with a total observation of 18738. T-statistics reported in parentheses are based on White standard errors corrected for clustering
by firm. ⁎, ⁎⁎, and ⁎⁎⁎ indicate statistical significance at the 10%, 5%, and 1% levels, respectively. All variables are defined in Appendix A.
CrashRiski, T + 1 = 0 + 1 TransIOi, T + 2 DediSelli, T + 3 InformSelli, T

+ k Controlsik, T + IndustryDummies + YearDummies + µi, T .
k
(9)
Column (1) of Table 7 reports the result of regression analysis of Eq. (9). The results on DUVOLT+1 are very similar and thus are
unreported for brevity. Column (2) – (6) are also reported to test the robustness. As showed in Table 7, institutional types in
descending order by the coefficient of institutional ownership are transient, dedicated, and informed-dedicated institutions. This
result is accord with H2 and confirms that selling order is more (less) aggressive for transient (dedicated) institutions (Keim and
Madhavan, 1995; Kyle, 1985; Edmans, 2009). Additionally, the coefficients of informed-dedicated ownership, which are least pro-
nounced, are evident of its distinction from dedicated ownership. Specifically, transient (dedicated) institutional investors would sell
stocks more (less) rapidly and heavily to prevent negative price impact of their selling, making the effect of institutional ownership on
crash risk more (less) pronounced. Informed-dedicated institutional investors have the weakest effect on crash risk due to their
advantage of inside information and concealing of selling.
5.5. Institutional investor competition and crash risk
To examine hypothesis H3 that whether or not the positive relation between institutional ownership and crash risk is more
pronounced for stocks with more institutional investor competition, we run the following regression:
16
CrashRiski, T + 1 = 0 + 1 Compi, T × IOi, T + 2 IOi, T

k
+ k Controlsi, T + IndustryDummies + YearDummies + µi, T .
k (10)
where Compi,T serves as proxy for institutional investor competition, which is measured by two set of variables to ensure the ro-
bustness of the results. One set includes #Inst and HerfInst, and the other set includes #Trans and HerfTrans. All these variables are
discussed in Section 3.3.
Table 8 reports the regression results. The results on DUVOLT+1 are very similar and thus are unreported for brevity. The
estimated coefficients on Compi,T × IOi,T in all columns of Table 8 are significantly positive (t-statistics at 6.89, 5.13, 5.50 and 6.08,
respectively). Such results are consistent with hypothesis H3, confirming that the relation between institutional ownership and crash
risk is more pronounced for stocks with more institutional investor competition. These results are also in line with traditional view
that investor competition exacerbates difficulty of investors’ coordination and hence induce competitive trading which strengthens
institutional selling behavior in response to firm’s bad news (Holden and Subrahmanyam, 1992; Edmans and Manso, 2011; Akins
et al., 2012). In particular, for stocks with intensive institutional competition, once an institutional investor find negative information
and decide to exit, she would not coordinate with other investors, and tends to exit by heavily selling, making her selling pressure
heavier, which amplifies her influence on crash risk.
6. Conclusion
Stock price crashes bring damages to the wealth and confidence of investors. China’s securities regulatory authorities have
expected that institutional investors, who are considered to represent rational investors, can reduce market volatility. This study
examines the role of institutional investors on firm-specific stock price crash risk in A-shares market.
We find robust evidence that institutional ownership exacerbates future firm-specific crash risk in A-shares market. Our results
also suggest that this effect stems from the practical dilemma that institutional investors in A-shares market can only exit rather than
voice, making selling pressure in response to firm’s bad news increasing and thus amplifying the market response to firm’s bad news.
Our results also imply that short-termism and information competition of institutional investors could strengthen the effect of in-
stitutional ownership on crash risk.
This study sheds light on the role of institutional investor from the crash risk perspective, and provides valuable reference for
investors and policy-makers. Investors should be vigilant about the increasing crash risk in stocks with high level of institutional own-
ership, especially when institutional investors’ short-termism and information competition are high. Regulators are reminded of the
unintended consequences of institutional investors. Due to the special share structure of listed firms in A-shares market, institutional
investors only focus on short-term profits and just exit in response to firm’s bad news, which adds selling pressure to the market and
exacerbates firm-specific crash risk. Thus, in order to improve the role of institutional investors on the market stability, regulators should
deal with the negative effect of sole majority shareholder on corporate governance in A-shares market. Investor competition could not
weaken, but worsen the negative role of institutional investors by strengthening their selling pressure in response to firm’s bad news.
Future research could investigate the impact of institutional investors on the stability of market in the context of their trading stra-
tegies. For example, it is interesting to examine whether the cooperation of institutional investors matters for the stability of the market.
Acknowledgments
The authors are grateful for helpful comments from Jonathan Batten (the Editor) and anonymous referees. Yunqi Fan ac-
knowledges the support from the National Social Science Foundation of China (Grant No. 18CGL010).
Appendix A. Summary of variables
Variable Definition
NCSKEW The negative coefficient of skewness of firm-specific weekly returns in a fiscal year.
DUVOL The log of the ratio of the standard deviation of firm-specific weekly returns for the “down-day” sample to standard deviation of weekly returns for the
“up-day” sample in a fiscal year.
IO Institutional ownership at the end of a fiscal year
InstSell The negative value of the first order difference of IO
LNSIZE The natural logarithm of market values of equity at the end of a fiscal year.
ROE The returns on equity in a fiscal year.
DTURN The average monthly share turnover over year t minus the average monthly share turnover the previous year t−1, where monthly share turnover is
calculated as the monthly share trading volume divided by the number of tradable shares outstanding in a month.
MTB The market-to-book ratios at the end of a fiscal year;
LEV The total book value of liabilities divided by the total assets at the end of a fiscal year.
KURT The kurtosis of firm-specific weekly returns in a fiscal year.
RET The cumulative firm-specific weekly returns in a fiscal year.
SIGMA The standard deviation of firm-specific weekly returns in a fiscal year.
ABACC The absolute value of discretionary accruals in a fiscal year, where discretionary accruals are estimated from the modified Jones model (Dechow
et al., 1995).
IDIO The idiosyncratic risk, which is calculated following Hutton et al. (2009).
17
CONC The average percentage of an institution’s total equity holdings invested in each portfolio firm.
APH The average size of the institution’s ownership position in its portfolio firms
LBPH The percentage of institution’s equity that is invested in firms where it has greater than 5 percentage of ownership
HERF Herfindahl measure of concentration calculated using the squared percentage ownership in each portfolio firm
PT The average absolute change in the institution’s ownership positions over a half year
STAB The percentage of the institution’s stock that is held for more than one year
#Inst The number of institutional investors holding the firm’s stock
HerfInst Negative value of the Herfindahl index of the relative holdings of shares of each institutional investor for a given firm
#Trans The number of transit institutional investors holding the firm’s stock
HerfTrans Negative value of the Herfindahl index of the relative holdings of shares of each transient institutional investor for a given firm
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Emerging Markets Review 42 (2020) 100670

Contents lists available at ScienceDirect

Emerging Markets Review

Institutional investors, selling pressure and crash risk: Evidence

School of Business, Jiangnan University, China

ARTICLE INFO ABSTRACT

2. Literature review, practical dilemma and hypothesis development

3.1. Firm-specific crash risk

Wi, t = ln(1 + i, t ) (2)

DUVOLi, T = log (nU 1) Wi2, t /(nD 1) Wi2, t

3.2. Classification of institutional investors

3.3. Institutional investor competition over information

3.4. Control variables

3.5. Basic regression model

4. Sample and data

4.1. The sample

4.2. Descriptive statistics

Panel B: Year distribution

Variables Mean Median Std.Dev. 25% 75%

NCSKEWT+1 −0.1669 −0.1926 0.7757 −0.6780 0.3271

Panel B. Correlation matrix

NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1

IOT 0.0145⁎⁎⁎ 0.0100⁎⁎⁎ 0.0146⁎⁎⁎ 0.0101⁎⁎⁎ 0.0159⁎⁎⁎ 0.0111⁎⁎⁎

5.1. Results of institutional ownership on crash risk

5.2. Robustness checks

5.2.1. Different control variables

5.2.2. Alternative measure of firm-specific crash risk

5.2.3. Exclusion on manufacturing sector

IOT 0.0028 ⁎⁎⁎

Panel B. Exclusion on manufacturing sector

IOT 0.0142 ⁎⁎⁎

Panel C. Different subsample periods

Sample period 2006–2016 2006–2016 2005–2010 2005–2010 2012–2016 2012–2016

NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1 NCSKEWT+1 DUVOLT+1

IOT 0.0169 ⁎⁎⁎

(1) (2) (3) (4)

OLS OLS Change-in-variable Change-in-variable

NCKSEWT+1 DUVOLT+1 △NCKSEWT+1 △DUVOLT+1

IOT 0.0089 ⁎⁎⁎

(continued on next page)

Panel E. Instrumental variable approach

IOT 0.0500 ⁎⁎⁎

5.3. Additional evidence for selling pressure

(1) (2) (3) (4) (5) (6)

NCSKEWT+1 NCSKEWT+1 InstSellT+1 NCSKEWT+1 NCSKEWT+1 NCSKEWT+1

Panel B. Analysis on future crash risk (DUVOLT+1)

(1) (2) (3) (4) (5) (6)

DUVOLT+1 DUVOLT+1 InstSellT+1 DUVOLT+1 DUVOLT+1 DUVOLT+1

Panel B. Analysis on future crash risk (DUVOLT+1)

(1) (2) (3) (4) (5) (6)

DUVOLT+1 DUVOLT+1 InstSellT+1 DUVOLT+1 DUVOLT+1 DUVOLT+1

Constant −0.4475 ⁎⁎⁎

InstSelli, T + 1 = 0 + 1 IOi, T + 2 Controlk i, T + µi, T

CrashRiski, T + 1 = 0 + 1 InstSelli, T + 1 + 2 IOi, T

5.4. Institutional investors characteristics and crash risk

5.4.1. Classification of Institutional investors

APH 0.97 0.08

Panel B. Cluster analysis based on factor scores

Cluster N Factor scores mean

Transient 9595 −0.4043 0.7754

Panel C. Persistence of cluster membership across time

Cluster-year T Transient Quasi-Indexers Dedicated Informed-Dedicated

Transient 74.76 21.77 2.76 0.71