Who Moves First? Price Discovery by Institutional and Retail Investors

This paper uses a data set of 77 million trades from Finland during the period 2003 to 2009 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. We find foreign institutional investors in our data set dominate the price discovery process. Regression models are estimated to provide additional evidence as to which key determinants (including trading volume, effective spread, cross listing, capital expenditure and leverage) explain the informational contribution of foreign institutions to price discovery. Results from both buys and sells confirm that trading volume is the key factor that explains the information contribution of foreign institutions to price discovery. There is an inverse relation between trading volume and the information contribution to price discovery for buys, while volume is positively related to price discovery in sells. The outcomes of this paper contributes to our understanding of the systematic trading patterns and preferences of foreign institutional traders, and the role they play as counterparties to domestic retail traders during price discovery process in the intra-day space