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Little guys, liquidity, and the informational efficiency of price: Evidence from the Tokyo Stock Exchange on the effects of small investor participation

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  • Ahn, Hee-Joon
  • Cai, Jun
  • Hamao, Yasushi
  • Melvin, Michael

Abstract

This paper provides an analysis of the equity-market effects of a substantial increase in individual shareholder participation in the market for a firm. The data are based on reductions in lot sizes or Minimum Trade Units (MTUs) on the Tokyo Stock Exchange (TSE). There is a shift in order flow from large to small trades after MTU reductions. Since small, individual investors are generally thought to be noise traders, it may be expected that greater individual investor participation creates greater liquidity, but adds noise to prices, lowering the informativeness of prices and increasing return volatility, as found in studies of stock splits. However, the influx of individual investors, while associated with the presence of more noise traders, lowers the probability of informed trades and results in greater liquidity. Results suggest that greater noise trading induces the informed to trade more aggressively and makes price more informative. Finally, given the benefits of MTU reduction, we ask why all firms do not lower their MTU. The answer appears to be that some firms have characteristics making them better off without an MTU change. For example, firms having strong cross-holdings with other firms, as in keiretsu, value strong relationships with a few suppliers and customers so that having a larger individual shareholder base is not as attractive. In addition, firms that have not experienced a significant increase in their share price have less incentive to lower their MTU.

Suggested Citation

  • Ahn, Hee-Joon & Cai, Jun & Hamao, Yasushi & Melvin, Michael, 2014. "Little guys, liquidity, and the informational efficiency of price: Evidence from the Tokyo Stock Exchange on the effects of small investor participation," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 163-181.
    • Handle: RePEc:eee:pacfin:v:29:y:2014:i:c:p:163-181
    DOI: 10.1016/j.pacfin.2014.04.001
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    Cited by:

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    2. Yingyi Hu, 2019. "Short-horizon market efficiency, order imbalance, and speculative trading: evidence from the Chinese stock market," Annals of Operations Research, Springer, vol. 281(1), pages 253-274, October.
    3. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "More shareholders, higher liquidity? Evidence from an emerging stock market," Emerging Markets Review, Elsevier, vol. 44(C).
    4. Lim, Kian-Ping & Thian, Tze-Chung & Hooy, Chee-Wooi, 2015. "Corporate Shareholdings and the Liquidity of Malaysian Stocks: Investor Heterogeneity, Trading Account Types and the Underlying Channels," MPRA Paper 67602, University Library of Munich, Germany.
    5. Nor Elliany Hawa Ibrahim & Kamarun Nisham Taufil Mohd & Karren Lee-Hwei Khaw, 2019. "Effect of Standardization of Trading Board Lot on Abnormal Liquidity in Malaysian Stock Market," Capital Markets Review, Malaysian Finance Association, vol. 27(2), pages 89-102.
    6. Ramos, Henrique P. & Perlin, Marcelo S. & Righi, Marcelo B., 2017. "Mispricing in the odd lots market in Brazil," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 618-628.
    7. Priyanka Naik & Y. V. Reddy, 2021. "Stock Market Liquidity: A Literature Review," SAGE Open, , vol. 11(1), pages 21582440209, January.
    8. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Liquidity and firm value in an emerging market: Nonlinearity, political connections and corporate ownership," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
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    More about this item

    Keywords

    Minimum trade unit; Liquidity; Individual investors; Noise trading; Informational efficiency of price; Tokyo Stock Exchange;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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