IV. Conclusions
A major conclusion of this study is that the shareholder base is important for understanding crosssectional variation in stock return volatility. The main focus has been investigating an intriguing but so far under-researched conjecture which holds that volatility decreases in the size and diversity of the firm’s shareholder base because these factors improve the information content of the stock price. We show that various proxies for the size and diversity of the shareholder base in fact increase volatility, contradicting the conjecture. This conclusion is robust to changes in the econometric approach, and holds after taking self-selection into account.
The data strongly supports a trading channel explanation for these findings. We are able to verify that proxies for the size of the shareholder base are positively related to trading volume, and that its effect on volatility goes through this channel. We have therefore identified some of the factors that appear to underlie the association between volume and volatility reported in the literature. We have proposed that the association between having a large shareholder base and high volatility may be indicative of the presence of noise trading. Such trading is often linked to behavioral biases like trend-following and over-confidence. However, we caution against interpreting this evidence as saying that a large and diversified shareholder base is inherently bad. Our results need to be seen in relation to the literature on neglected stocks: somewhat higher volatility could be a price well worth paying to avoid the detrimental value effects from “flying below the radar” of the broader investment community.
