Do Demand Curves for Stocks Slope Down in the Long Run?
64 Pages Posted: 10 Aug 2016 Last revised: 23 Mar 2019
Date Written: March 19, 2019
This paper uses China’s Split-Share Structure Reform to overcome methodological limitations that have hampered previous understanding of the slope of long-term demand curves. The reform mandated the conversion of non-tradable local A-shares to tradable status and increased A-share float, but had no effect on foreign B-share float. Across firms, larger increases in A-share float lead to larger decreases in A-share price relative to B-share price, even up to around ten years after the reform, suggesting that demand curves slope down in the long run. Larger increases in float also lead to larger decreases in turnover and volatility, and demand curves are steeper when divergence of opinion is greater, consistent with the theory modeling investors with heterogeneous beliefs.
Keywords: Long-Term Demand Curve; Divergence of Opinion; Split-Share Structure Reform; A/B Share; Lack of Substitutes
JEL Classification: G02; G12; G15
Suggested Citation: Suggested Citation