How Retail vs. Institutional Investor Sentiment Differ in Affecting Chinese Stock Returns?

Abstract

This paper evaluates the impact of retail investors’ bullish sentiment in comparison to that of financial institutions on the return of Chinese CSI 300 index stocks over the period of 2015 to 2023. We document several regularities. First, the stronger the retail (institutional) investors’ bullish sentiment, the lower (higher) the stock returns, and such contrasting associations hold after an array of robustness tests. Second, mechanism test results show that the retail and institutional investor sentiments affect stock returns mainly by influencing the analysts’ attention and the equity liquidity. Third, heterogeneity analyses reveal that the adverse effect of retail investors’ bullish sentiment on stock returns becomes more prominent for non-state-owned, manufacturing, and non-heavily polluted enterprises, but the positive effect of the emotions expressed by institutional investors on stock returns is greater for non-state-owned, non-manufacturing, and heavily polluted enterprises. Therefore, this paper sheds light on detailing of investor sentiment types and hedging investment risks.