Informational efficiency: Which institutions matter?

I study the role of institutional investors to play in the relative informational efficiency of transaction prices, measured by departures from a random walk, using a sample of the constituent stocks of the Shanghai 180 composite index from 2004 to 2005. I find that greater informational efficiency is associated with larger institutional holdings. Meanwhile, this result is not driven by the variations in liquidity measures. In addition, the evidence also indicates that all institutions have a strong preference for mispriced stocks, firms with good corporate governance, and large-cap and profitable firms. If the potential endogeneity and outliers are considered, the findings of three-stage least squares and median regressions suggest that larger shareholdings by independent institutions, particularly by mutual funds and social security fund, lead to a more efficient market because of their fewer potential business connections with invested companies.