The Effects of Superstar Firms on Individual Investors' Capital Allocation Patterns, Industry Returns & Sector Returns

Abstract

In this paper, I estimate the effects of the presence of a “superstar” firm on the capital allocation patterns of individual investors at the industry and economic sector level. First, I examine if individual investors react to the presence of a superstar firm and whether more investors hold that stock in their portfolios. Through the use of a distributed lag model, I then observe whether there are changes in the capital allocation patterns to the industry or economic sector where the superstar is present. I find that there is a reduction of 0.000202% in the number of individual investors holding stocks in an industry on the day of and a further 0.000497% decrease after a superstar firm has positive performance. As for predicting industry returns, there is an estimated 0.012390% increase on the first day followed by a sustained decrease. At the sector level, there does not appear to be any statistically significant effects on the capital allocation preferences, but there is a predicted decrease in sector returns on the first day. This paper contributes to the current literature on individual investor behavior by illustrating how salient firms have impacts in the market which is incredibly relevant as new technologies allow for greater access to equity markets. These new individual investors in the markets may behave in manners unlike prior generations of individual investors or what is predicted in rational agent economics.