Momentum, Reversals, and Investor Clientele

Abstract

The identical cash flow rights of Chinese A and B shares provide a natural experiment that allows us to explore how investor clienteles affect stock return patterns. Chinese domestic retail investors are responsible for the majority of trades in A shares, while foreign institutional investors have a significant presence in B shares. We find that B shares exhibit strong momentum while their corresponding A shares do not. In contrast, A shares exhibit significant short-term reversals while their B share counterparts do not. Furthermore, we document that institutional ownership strengthens momentum in B shares. These return patterns are consistent with a simple model where the trades of overconfident informed investors generate momentum and the trades of uninformed noise traders generate reversals.