This paper investigates the relationship between local equity market participation and stock liquidity, as a way to understand how noise trading of local retail investors affects stock liquidity. Given the fact that there are striking racial differences in risky asset holdings and large cross-sectional racial variations across U.S. counties, we use county-level racial composition as a proxy for the rate of local equity market
participation. We find that stocks headquartered in counties with higher fraction of local whites are more liquid. The effect is stronger for stocks with high retail concentration (i.e., small-size, low institutional ownership, low price, value, high volatility and scarce analyst coverage). It is also stronger for firms located in the “only-game-in-town” counties and in counties with more volatile household income streams. Our findings are consistent with microstructure models that predict a positive relationship between noise trading and liquidity. We provide further supporting evidence for Admati and Pfleiderer (1988) that the impact of local retail participation on stock liquidity is stronger when there are more institutional investors located around, especially local institutional investors with “small” investment style and “transient” trading style. Finally, we document a positive impact of local retail participation on firm value, supporting the view that liquidity increases firm performance. Collectively our results add to the understanding of the way that retail investor trading and local bias affect stock liquidity and firm value.
Keywords: stock liquidity, local equity market participation, retail investors, local bias, noise trading
JEL Classification: G10, G11, G14, G34
학회소식
학회소식
[2010년 제 4차] Local Equity Market Participation and Stock Liquidi
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게시일 :
2010-12-09