Individual Investor Trading and Stock Liquidity
Review of Quantitative Finance and Accounting, Forthcoming
39 Pages Posted: 14 Feb 2014
Date Written: February 12, 2014
Abstract
Recent studies suggest that individual investors may have private information and their trading can be informative. Consistent with this observation, we find that stocks that are more heavily traded by individual investors have higher liquidity, after controlling for other determinants of liquidity. The result is robust to various model specifications, the inclusion of firm, industry, and year fixed-effects, controls for endogeneity, and alternative measures of liquidity. The positive effect of individual investor trading on stock liquidity is stronger for firms with greater information asymmetry, consistent with individual investor trading reducing information asymmetry. These results suggest that individual investor trading improves stock liquidity through reducing information asymmetry.
Keywords: Individual Investor, Trading, Stock Liquidity, Information Asymmetry
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