Who Moves First? Price Discovery by Institutional and Retail Investors

ABSTRACT This paper uses 77 million Finnish trades, classified as foreign institutional or domestic retail, to examine the drivers of price discovery. The results show that foreign institutional investors dominate price discovery overall, including during the Global Financial Crisis. Their informational advantage is explained by buy‐ and sell‐initiated trading volume, indicating superior information quality rather than trading scale. Effective spreads are positively associated with information contribution, suggesting stronger price discovery when transaction costs are higher and liquidity is lower. These findings suggest that price discovery is driven by informed investors rather than marginal trading activity.