دانلود رایگان ترجمه مقاله بررسی تجارت سرمایه گذار فردی و تاثیر آن روی اعتبار شرکت (نشریه الزویر 2015)

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Does individual investor trading impact firm valuation?

Abstract

Motivated by recent evidence of informed trading by individual investors (Kaniel et al., 2012, Kelley and Tetlock, 2013, Wang and Zhang, 2015), we posit that individual investor trading enhances firm performance. Consistent with the conjecture, we find that individual investor trading positively impacts firm value. The results are robust to inclusion of year, industry and firm fixed effects, alternative model specifications, a control for endogeneity, Granger causality test, matched sample analysis and subsample analyses. The positive effect of individual investor trading on firm value is stronger for firms with higher information production and stocks with higher spread, consistent with the information and spread channel mechanism. Our results suggest that trading by individual investors enhances firm value by improving stock price informativeness and reducing spread.

1 Introduction

The role of individual investor trading in financial markets is a subject of widespread interests. However, the relevant evidence is far from converging. Some studies indicate that individual investors are subject to fads and psychological biases (Odean, 1998; Barber and Odean, 2000; Kumar, 2009; Han and Kumar, 2013), are uninformed noise traders (e.g., Kumar and Lee, 2006; Barber et al., 2009a, 2009b; Ng and Wu, 2010), and their trading activity adds volatility to stock prices (Foucault et al., 2011).

However, there is also a strong literature that points to the collective rationality of individual’s in the marketplace and to the informativeness of individual investor trading.2 Forsythe et al. (1992) find that a sufficient number of traders in Iowa Political Stock Market were free of judgment bias. Jackson (2003) finds trades of individuals predict future market returns on the Australian Stock Exchange. Kaniel et al. (2012) find that aggregate individual investor trading predicts abnormal returns on and after earnings announcement dates, and about half of the post earnings announcement abnormal returns can be attributed to private information. Kelley and Tetlock (2013) find that retail investors’ orders convey fundamental information and the aggregated decisions of retail traders contribute to market efficiency. In particular, they offer two potential channels for reconciling the recent findings of informed individual investor trading with prior studies. First, the individual investor trading data used in previous research may not be representative. Second, the aggregate skill of individual investors may have improved over time. Evans (2010) finds that retail trading increases stock price accuracy. Wang and Zhang (2015) investigate the effect of individual investor trading on stock market liquidity and find that individual investor trading improves stock liquidity through reducing information asymmetry. These studies suggest that although not every individual investor has precise information, information revealed by collective individual investors trading can be relatively precise and valuable.

This study aims to examine role of individual investor trading by analyzing the NYSE ReTrac End of Day (EOD) database, which summarizes daily retail trading activities for each stock listed and traded on NYSE from March 2004 to December 2011, with the research design being different from previous literature in that we examine aggregate effect of individual investor trading on firm valuation. We find strong evidence that daily aggregate individual investor trading in each stock has a positive impact on firm valuation. The result is remarkably robust to alternative model specifications, the inclusion of year, industry, firm fixed effects, a control for endogenous individual investor trading using two-stage least square regressions, and the use of alternative measures of firm valuation. Granger causality tests and nearest neighbor matching analyses suggest a causal effect of individual investor trading on firm valuation.

We then explore the information channel through which individual investor trading affects firm value.3 Our conjecture is that individual investor trading enhances firm value by improving stock price informativeness. If our conjecture is true, the effect of individual investor trading on firm value should be stronger when individual investors are more likely to have additional information and their aggregated trading is more informative. Dow et al. (2011) suggest more information production in financial market about good firms than about bad firms. Thus individual investors are more likely to have private information about good firms, and by incorporating their private information into stock price through trading, their trades should have stronger effect on value of good firms. Consistent with the information production hypothesis, we find that the effect of individual investor trading on firm value is stronger for good firms that have higher Tobin’s q or return on assets.

The improvement in price informativeness induced by individual investor trading should reduce information asymmetry and spread, leading to higher firm value. To test the spread channel, we first perform nearest neighbor matching analyses of relative spread to see how individual investor trading affects spread. We examine change in relative spread of stocks of otherwise very similar firms with high and low individual investor trading, and find that individual investor trading have a negative effect on change in spread. Moreover, if the spread channel works, we would expect the effect of individual investor trading on firm value to be stronger for high spread stocks. Consistent with this expectation, we find that individual investor trading has a significantly positive effect on market-to-book ratio for high spread stocks, but no significant effect for low spread stocks.

This study makes several contributions to the literature. First, this study contributes to the individual investor trading literature by using of a direct NYSE retail trading data from the most recent time periods. The majority of previous studies on individual investor trading use data from brokerage firms that only cover a small set of individual investors (see, for examples, Barber and Odean, 2000; Barber and Odean, 2008; Graham and Kumar, 2006; Ivkovic and Weisbenner, 2005; Kumar and Lee, 2006), or examine nonUS retail trading data (Barber et al., 2009a, 2009b), or rely on individual investor trading proxies such as small trade size (Lee and Radhakrishna, 2000; Barber et al., 2009a, 2009b; Han and Kumar, 2013) or odd-lot trading. However, there are problems associated with the data sources that may produce biased results. A small group of retail investors of certain brokerage firms may not be a representative sample in terms of trading skills and information sources (Kelley and Tetlock, 2013). Using trade size or odd-lot trading as individual investor trading proxies suffer from important limitations and can bias results, especially for recent years.4

Next, our study contributes to the ongoing debate on whether individual investor trading is informative. Literature on individual investor trading has long treated individual investors as irrational or noise traders and focused on whether individual investors lose by trading (for example, Kumar and Lee, 2006; Barber et al., 2009a, 2009b). Recent studies provide evidence of price informativeness of trading by individual investors, and suggest that individual investors may possess valuable private information (Evans, 2010; Jackson, 2003; Kaniel et al., 2012; Kelley and Tetlock, 2013; Wang and Zhang, 2015). Our study extends this line of literature by providing evidence that is consistent with informative trading by individual investors.

Finally, our study is also related to the literature at the intersection of market microstructure and corporate finance, especially on relation between financial market and firm fundamentals. Financial markets not only reflect firm fundamentals, but also affect firm fundamentals. Baker et al. (2003), Luo (2005), and Chen et al. (2007) provide evidence that market prices affect firms’ investments via managerial learning and/or the firm’s access to new capital. Roll et al. (2009) study the effect of options trading on firm value and show that corporate investment in firms with greater options trading is more sensitive to stock prices. Fang et al. (2009) find that stock market liquidity positively impact firm performance through increasing the information content of market prices and of performance-sensitive managerial compensation. Our study contributes to this line of literature by showing that trading by individual investors affects firm performance and it makes its impact through improving stock price informativeness.

The rest of the paper proceeds as follows. Section 2 develops hypotheses. Section 3 describes the sample, data sources and variable measurements. Section 4 presents the empirical results, and Section 5 concludes.