Revealed Stock Preferences of Individual Investors: Evidence from Chinese Equity Markets

Pacific Basin Finance Journal, Vol. 14, pp. 175-192, 2006

Posted: 3 Nov 2006 Last revised: 22 Sep 2008

See all articles by Lilian Ng

Lilian Ng

Schulich School of Business, York University; European Corporate Governance Institute (ECGI)

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

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Abstract

This study offers new evidence on the preferences of individual investors for certain stock characteristics. Based on 64.2 million trades executed by about 6.8 million Chinese investors, results show that stock preferences of individual investors vary with wealth levels. Wealthier individuals prefer highly liquid and volatile stocks, and stocks with greater state-ownership, growth potential, and good past return performance. However, less wealthy individuals prefer stocks with high beta, high liquidity, poor past return performance, and especially stocks with low price, and small capitalization. The strong preference for small and low-priced stocks reflects in part the regulatory constraints less wealthy individual investors face: the Chinese securities regulation prohibits investors from short selling and margin trading. Our overall results do not suggest that the investment choices of individual investors necessarily indicate only behavioral biases as existing studies might have implied, but instead, the findings reveal to some extent the rational investing behavior of Chinese individual investors. Finally, like institutions in developed markets, Chinese institutions also prefer large firms and firms with high earnings per share and large volatility.

Keywords: Individual investors, trading preferences, stock characteristics

JEL Classification: G1, G15

Suggested Citation

Ng, Lilian and Wu, Fei, Revealed Stock Preferences of Individual Investors: Evidence from Chinese Equity Markets. Pacific Basin Finance Journal, Vol. 14, pp. 175-192, 2006, Available at SSRN: https://ssrn.com/abstract=942079

Lilian Ng (Contact Author)

Schulich School of Business, York University ( email )

N223, Seymour Schulich Building
4700 Keele Street
Toronto, Ontario ON M3J 1P3
Canada
+1.416.736.2100 x77994 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

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