Little Guys, Liquidity, and the Informational Efficiency of Price : Evidence from the Tokyo Stock Exchange on the Effects of Small Investor Participation

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