Do individual investors demand or provide liquidity? New evidence from dividend announcements

Abstract

This paper provides new evidence related to whether individual investors demand or provide liquidity. While net trading is often used in the literature, it is improper in our research since buying and selling by individual investors increase by almost the same amount around dividend announcements. By differentiating buying and selling, we find that individual buyers demand liquidity while individual sellers provide liquidity around dividend announcements. Specifically, the buying volume of individual investors before and during dividend announcements negatively predicts future returns, while it is positively associated with past and contemporaneous returns. The selling volume of individual investors shows a similar relationship with returns.