Nominal Prices, Retail Investor Participation, and Return Momentum

We employ an identification strategy for retail participation to explore the link between return momentum and investing clientele. This scheme relies on strictly enforced round-lot rules in China, which financially constrain retail investors from participating in stocks with high nominal prices. We find that there is strong momentum in high-priced stocks but no momentum on aggregate. This result supports the idea that noise trades of retail investors mask momentum, whereas other more sophisticated investors contribute to momentum. We validate this notion by showing that retail investors with small (large) portfolios are less (more) prone to participating in stocks with high nominal prices. Further, small investor participation increases and momentum weakens following splits in high-priced stocks. Finally, we find that the positive relation between nominal prices and momentum extends to a considerable majority of international markets with round-lot rules.

This paper was accepted by Lukas Schmid, finance.

Funding: Y.-J. Liu acknowledges support from the National Natural Science Foundation of China [Grant 72172004].

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.01423.