Breadth of Ownership and the Comovement of Equity Prices in China Stock Market

In the past few decades, scholars have made extensive research on the breadth of ownership or the comovement of equity prices separately. However, the connection between these two factors has not been revealed. This paper attempts to find out the relationship between them and address this gap. Based on “A Simple Model of Capital Market Equilibrium with Incomplete Information†built up by Merton in 1987, I find that breadth of ownership have a great impact on the stock prices comovement with the market. As the breadth of ownership increases, the comovement between the stock prices and the market also increases. Besides, I find that some characters of stocks also affect this relationship, such as growth ability, volatility and the shareholders’ risk preferences. Higher growth ability, volatility or risk-aversion among shareholders could amplify this effect. Using data in China stock market between 2003 and 2014, I find that a 10%-increase in the number of shareholders of a stock is associated with additional 0.0113-0.0170 (about 1.08%-1.62%) increase in its beta with the market when other things are hold equal. It provides great evidence that investor behavior can affect the stock price comovement with the market.  JEL classification numbers: G40, G11, G12