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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

44 Pages Posted: 15 Mar 2005  

Hee-Joon Ahn

SungKyunKwan University

Jun Cai

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Yasushi Hamao

Center on Japanese Economy and Business; University of Southern California - Marshall School of Business - Finance and Business Economics Department

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: March 2005

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 is associated with a reduction in firm-specific volatility, along with greater liquidity, a lower probability of informed trades and an increase in the speed of adjustment of prices to a shock. MTU reductions are also associated with positive cumulative abnormal returns (CARs). Robust results indicate that CARs increase with greater firm-specific volatility, lower beta, increases in share volume, lower spreads, and increases in individuals as a percentage of total shareholders. Conditioned on these variables, the total number of shareholders has no significant effect on CARs. The results suggest that it is the composition of shareholders, in terms of individual investor participation, rather than the total number of shareholders, that determines the effect of a change in MTU on share prices. The greater is individual shareholder participation, the greater the return from MTU reduction.

Keywords: Small investors, noise traders, informed traders, microstructure, Tokyo Stock Exchange, minimum trading unit

JEL Classification: G14, G15

Suggested Citation

Ahn, Hee-Joon and Cai, Jun and Hamao, Yasushi and Melvin, Michael, Little Guys, Liquidity, and the Informational Efficiency of Price: Evidence from the Tokyo Stock Exchange on the Effects of Small Investor Participation (March 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=682462 or http://dx.doi.org/10.2139/ssrn.682462

Hee-Joon Ahn

SungKyunKwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)

Jun Cai

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Yasushi Hamao

Center on Japanese Economy and Business ( email )

3022 Broadway
New York, NY 10027
United States
310-717-0503 (Phone)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
310-717-0503 (Phone)

Michael Melvin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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