Revealed Stock Preferences of Individual Investors: Evidence from Chinese Equity Markets
Lilian K. Ng
University of Wisconsin - Milwaukee - Sheldon B. Lubar School of Business
Jiangxi University of Finance and Economics; Jiangxi University of Finance & Economics - International Institute for Financial Studies
This study offers new evidence on the preferences of individual investors for certain stock characteristics. Based on 64.2 million trades executed by about 6.8 million Chinese investors, results show that stock preferences of individual investors vary with wealth levels. Wealthier individuals prefer highly liquid and volatile stocks, and stocks with greater state-ownership, growth potential, and good past return performance. However, less wealthy individuals prefer stocks with high beta, high liquidity, poor past return performance, and especially stocks with low price, and small capitalization. The strong preference for small and low-priced stocks reflects in part the regulatory constraints less wealthy individual investors face: the Chinese securities regulation prohibits investors from short selling and margin trading. Our overall results do not suggest that the investment choices of individual investors necessarily indicate only behavioral biases as existing studies might have implied, but instead, the findings reveal to some extent the rational investing behavior of Chinese individual investors. Finally, like institutions in developed markets, Chinese institutions also prefer large firms and firms with high earnings per share and large volatility.
Number of Pages in PDF File: 31
Keywords: Individual investors, trading preferences, stock characteristics
JEL Classification: G1, G15working papers series
Date posted: January 20, 2007 ; Last revised: May 26, 2008
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