Institutional Investor Diversity, Herding Behavior, and Systemic Financial Risk: Evidence from China

Institutional investors exert significant influence on the operations and development of financial institutions, with different categories of investors playing distinct roles. We contend that institutional investor diversity may affect systemic financial risk. This study proposes novel measures of institutional investor diversity across 84 China’s financial institutions and employs Extreme Value Theory (EVT) to estimate systemic financial risk. Based on this, we empirically examine the relationship and underlying mechanisms. Baseline regression indicates that greater institutional investor diversity plays an effective role in controlling systemic financial risk. We further find that institutional investor diversity significantly suppresses herding behavior, thereby indirectly reducing systemic risk. Moreover, this effect is more pronounced in financial institutions operating in more developed market environments, under stronger external supervision, and with higher levels of technological advancement, as well as in securities firms. These findings not only contribute to the literature on the economic impact of institutional investors but also provide valuable insights for strengthening systemic financial risk control.