Macquarie University
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Trading behavior of institutional investors: investment decisions, impact and sustainability trends

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posted on 2023-07-05, 02:31 authored by Christian Neumeier

This dissertation investigates institutional investor trading behavior, profit and losses and associated costs while accounting for market structure complexities. Institutional ownership has seen an increase over the last decades which shows that end-money investors hold larger stakes in companies worldwide. While some institutional investors actively use their influence or select their portfolio based on fundamental research, others remain silent and acquire stock to satisfy a passive investment strategy. Simultaneously, there is a growing awareness of Environmental, Social and Governance (ESG) investments while the marketplace has undergone fundamental changes resulting from technological advances. 

The first part of this dissertation examines the dynamic relation between institutional ownership, market liquidity and ESG scores. It addresses the potential endogeneity of the factors and examines their dynamic relationship in a vector autoregressive (VAR) model. Previous research has mainly focused on binary relations between these factors and has highlighted possible implications of reverse causality. Little evidence has been gathered about the dynamic relationship between the full set of factors. The first part presents evidence about the dynamics between liquidity, ESG scores and investment style (which indicates if the investor is either passive or active). 

Building on the evidence presented, the second part of this thesis investigates if ESG-oriented investment strategies can achieve excess returns when accounting for liquidity and investment style. Investments in ESG stocks might result from investors actively selecting stocks or from following a passive strategy. In either case, the increase in trading volume interacts with stock liquidity and impacts information asymmetries. First, it is demonstrated that high ESG score stocks display lower information asymmetries compared to low ESG score titles. Additionally, this dissertation provides new insights by showing that ESG investments yield negative returns only for stocks with higher information asymmetries. If information asymmetries are low, ESG strategies show no significant abnormal returns, which is in accordance with the efficient market hypothesis. 

The third part investigates venue selection and execution costs of institutional orders. ESG strategies implemented by institutional investors require liquid markets as their investment volume is typically substantial. The execution of these large volumes can cause unfavorable price impacts and be costly in terms of transaction costs when executed as a single order. Hence, institutional investors slice and dice these large orders into smaller ones in an attempt to improve overall transaction prices and market impact. Using a novel proprietary transaction-level dataset from UK equity markets, the third part of this thesis demonstrates that decisions to trade on venues with lower levels of pre-trade transparency are associated with lower transaction costs. Additionally, it is revealed that institutional investors use substitute venues when dark pool trading is prohibited. 


Table of Contents

1 Introduction -- 2 Related literature -- 3 Dynamics between ESG scores, investment style and liquidity -- 4 ESG scores and stock performance. The role of liquidity -- 5 Banning dark pools: venue selection and investor trading costs -- 6 Conclusion -- Appendix: authorship statement -- Bibliography

Awarding Institution

Macquarie University. Justus-Liebig University

Degree Type

Thesis PhD

Department, Centre or School

Department of Applied Finance

Year of Award


Principal Supervisor

Christina E. Bannier

Additional Supervisor 1

Andrew Lepone

Additional Supervisor 2

Andreas Walter


Copyright: The Author Copyright disclaimer:




178 pages

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