Demographic Characteristics and Attributes of Croatian Capital Market Participants

ABSTRACTThis paper provides an overview of participants' characteristics in the Croatian capital market. Based on the collected data of demographic characteristics, the typical sophisticated Croatian market participant could be described as a male person in the second half of the thirties, highly educated, probably in the economic profession, with 11-14 years of work experience. His market presence is about five years and longer. Typically, his portfolio has at least one transaction quarterly, although trades can also occur more frequently. His portfolio contains no less than 3 and no more than 10 stocks. The main source of information is the Internet, and he often talks with friends who are also market participants. On the other hand, conversations with analysts, brokers, etc. are relatively seldom. He reads business and professional literature even more infrequently. His home bias is so strong that it was not even shaken by the domestic market illiquidity. While there are several possible explanations for this phenomenon, it seems that asymmetry of information and behavioral traits are the most plausible ones.INTRODUCTIONThe Croatian capital market is often referred to as one of the most developed of the South-Eastern European countries. It features a solid market infrastructure with thirty brokerage houses, about 240 active securities and a market capitalization of around 23 billion USD (ZSE, 2012). However, the Croatian market is just one of a dozen European frontier markets1. In other words, it ranks among markets where participants encounter risks that are not common in developed markets. Some of the risks attributed to frontier markets are: sovereign (default) risk, governance issues (conflict of interests, misleading financial reporting, poor accounting, etc.), legal restrictions and regulation (foreign ownership limitations, currency limitations, discriminatory rules for foreign investors), exchange rate risk, volatility risk, and liquidity risk. However, in the case of Croatia, many of the political, legal and governance issues were successfully resolved during the EU accession negotiations, and may be considered minor in comparison with other frontier countries. Furthermore, although Croatia has according to the FTSE Quality of Markets criteria (FTSE, 2011a) no free and well developed foreign exchange market, the importance of the related risks can also be assessed as low. Namely, Croatia has a highly euroized small and open economy, in which the primary objective of monetary authorities is to maintain a stable exchange rate. Over the past eighteen years, the exchange rate has fluctuated within a narrow band of +/- 6% around the average exchange rate in the same period. As for the volatility and, especially sovereign and default risks, these are issues that in today's post-crisis days have to be closely watched all over the world, and are, therefore, not specifically "ffontierish". Thus, not only did the Croatian credit rating not deteriorate, but, unlike most countries in the region, at the end of March 2012 Croatia retained the S&P and Fitch long-term BBB- rating. The permanent common denominator of all frontier markets is the liquidity risk. In such a market buying and selling securities can be quite troublesome: not only is there no room for sizeable global investment, but investors are faced with large bid / ask spreads, sizeable slippage and, in some cases, virtually nonexistent market depth2. Although the Croatian market is certainly not one of the most thinly traded (Eastern) European markets, it can be said that it is suffering from a chronic lack of liquidity (Benic and Franic, 2008). The Croatian annual stock market turnover to GDP ratio is consistently below 7%, and in early 2012 the average daily turnover was only about 3.5 million USD. The ten largest companies account for about 70% of total market capitalization and turnover (ZSE, 2012a).The motivation for this study was to gather data on basic demographic characteristic of local investors in the Croatian equity market and glean some insight into what factors drive their behavior in the market. …