Price discovery, ownership structure and portfolio diversification by investor categories

Abstract

This thesis contains three stand-alone studies that relate to price discovery, ownership structure and portfolio diversification by investor categories. The first study uses a data set of 77 million trades from Finland to provide new market-wide evidence on which of the two dominant investor categories, foreign institutional or domestic retail investors, contributes most to price discovery. The study finds that foreign institutional investors dominate price discovery, and that the key factor that explains foreign institutions’ information contribution is buy and sell initiated trading volume. The second study offers a global view of what attracts international institutions to invest in corporations around the world. The study finds that institutional investors have a strong preference for stocks in larger firms with higher levels of foreign business operations with greater revenue and higher leverage. Institutions invest in firms in countries with a more volatile macroeconomic environment that operate under a common law system and have tax benefits on dividends. The presence of foreign institutions enhances shareholder value, and firms have better profitability and future growth opportunities. The third study shows that Finnish individual investors hold under-diversified portfolios. In particular, female investors are less diversified than male investors. The average diversification level improves over 20 years of data. The level of under-diversification is greater among younger, low income, less educated and less sophisticated investors. The level of under-diversification is correlated with investment choices that are consistent with overconfidence. As the level of diversification increases, both male and female investors’ performance measures increase.