Nominal Prices, Retail Investor Participation, and Return Momentum

Abstract

We employ an identification strategy for retail participation to explore the link between return momentum and investing clientele. This scheme relies on strictly enforced round-lot rules in China, which financially constrain retail investors from participating in stocks with high nominal prices. We find that there is strong momentum in Chinese A shares with high nominal prices, but no momentum on aggregate. This result supports the idea that the noise trades of small retail investors mask momentum, while other, more sophisticated investors contribute to momentum. We validate this notion by showing that small retail investors (institutions) are less (more) prone to participating in stocks with high nominal prices. Further, small investor participation increases and momentum weakens following splits in high-priced stocks. Finally, we find that the positive relation between nominal prices and momentum extends to a considerable majority of international markets with round-lot rules.

Keywords: Momentum, Retail investors, Nominal stock prices

JEL Classification: G14, G41