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Local equity market participation and stock liquidity

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  • Zhang, Lei

Abstract

This paper investigates the relationship between local equity market participation and stock liquidity. We use county-level racial composition as a proxy for local retail participation. We find that stocks headquartered in counties with a higher white percentage are more liquid. This effect is stronger among stocks with a high retail concentration (i.e., small size, low institutional ownership, low price). Our findings support Admati & Pfleiderer (1988. Review of Financial Studies, 1, 40). that noise trading increases liquidity under endogenous informed trading, i.e., the impact on liquidity is stronger when there are more institutional investors located nearby, especially the ones with “small” investment styles and “transient” trading styles.

Suggested Citation

  • Zhang, Lei, 2017. "Local equity market participation and stock liquidity," The Quarterly Review of Economics and Finance, Elsevier, vol. 63(C), pages 101-121.
    • Handle: RePEc:eee:quaeco:v:63:y:2017:i:c:p:101-121
    DOI: 10.1016/j.qref.2016.02.005
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    Cited by:

    1. Xiong Xiong & Chen Wang & Dehua Shen, 2020. "Market Participation Willingness and Investor’s Herding Behavior: Evidence from an Emerging Market," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(3), pages 439-452, September.

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    More about this item

    Keywords

    Stock liquidity; Retail investors; Local bias; Noise trading;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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