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The Sunday Paper – CSI Index Reconstitutions: A Quasi-Natural Experiment in China

China’s stock markets, where institutional investors don’t dominate shareholder registers, make a good place to study how their participation changes the behavior of listed companies.

In the U.S. studies have had a harder time pinning down the effect as so much of the market is already dominated by institutions. In China though their presence is notably increased when a stock joins a major index. In the case of this study the China Securities Index (CSI, 300 and 500).

Hongdai Li of Guosen Securities and Srinivasen Selvan of the the Peking University decided to study the effects of what happens when stocks joined the CSI Index and institutional investor interest, and holdings, increase.

They arrived at some encouraging conclusions. Videlicet?

  1. Higher institutional ownership increases the likelihood AND amount of dividends
  2. Firm performance improves when more institutional shareholders are on board and,
  3. The firm’s ‘information environment’ becomes noticeably better

I believe the effects of broader institutional ownership are universal and, despite occasional ( and always well publicized!) governance and activism shortcomings, institutional investors exercise a beneficial effect in aggregate on companies whose stocks they hold. This study supplies a useful proof for the notion.

You can access the paper in full via the following link CSI Index Inclusion Effects.

Happy Sunday.

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