Individual Investor Trading and Firm Valuation

Motivated by recent evidence of informed trading by individual investors (Kaniel, Liu, Saar and Titman (2012)), we posit that individual investor trading enhances firm performance. Consistent with the conjecture, we find that trading by individual investors have a positive effect on firm value measured by Tobin’s q. The results are robust to inclusion of year, industry and firm fixed effects, a control for endogeneity, and different model specifications. The positive effect of individual investor trading on firm value is stronger for firms with greater information asymmetry, when information production is high, and for firms with higher agency cost of capital, all supporting an information channel. Our results indicate that trading by individual investors enhances firm value by improving stock price informativeness.