Essays on Investor Heterogeneity in Equity Markets

Abstract

This dissertation examines asset pricing implications of investor heterogeneity in equity markets. Chapters 1 and 2 study differences between retail investors and institutional investors, while Chapter 3 focuses on heterogeneity among different institutions. Chapter 1 studies retail investor trading behavior around stock-level trading pauses in Korea, which are triggered after extreme intraday price movements. The stated goals of this market intervention tool are investor protection and price stability. However, I find no significant improvement in measures of price stability, and instead find unintended negative consequences on retail investors. Because trading pauses are salient events, retail investors trade excessively once pauses are triggered, and they trade in the wrong direction by betting on price continuation. Trading pauses become a window of wealth transfer from retail to institutional investors, and estimates for the wealth transfer and trading costs together amount to approximately USD 350 million per annum. Chapter 2 (co-authored with Stella Park and Alfred Qi Fan) studies the "overnight-intraday return gap." In both developed and emerging stock markets, overnight (close-to-open) returns are higher relative to intraday (open-to-close) returns. We propose a noise trader-based explanation for this overnight-intraday return gap. We use exact and exhaustive retail investor trade flow data available for the Korean stock market to establish the relationship between the overnight-intraday return gap and retail investor intensity. Furthermore, we use the pandemic-induced retail trading frenzy as a shock to retail trading intensity to address endogeneity concerns. Chapter 3 (co-authored with Sangmin Oh and Jihong Song) shifts the focus to the US market and studies the heterogeneity in investor demand for sustainable equity investing. We measure firm-level sustainability across three dimensions: third-party environment scores, emissions, and green patents. Separately estimated institutional investor demands are sensitive to scores and emissions, but not to green patents. We then aggregate these heterogeneous demands in an equilibrium framework to draw implications for the effectiveness of sustainable investing: (i) price-elastic investors do not "undo" effects of sustainable investors, (ii) investor pressure for sustainability only weakly predicts future improvements in firm sustainability, and (iii) incorporating green patents into ESG ratings can be a valuable adjustment.