The Investor-Base Hypothesis of Stock Return Volatility: Empirical Evidence

Abstract

A conjecture in the literature holds that a large and diversified investor base leads to lower volatility by improving the quality of the price signal. In this paper this hypothesis is examined using unique Swedish ownership data. The data does not support the conjecture. Instead, volatility increases in the number of investors and in the size of the firm’s micro-float (the fraction of shares held by investors with stakes below 0.1%). In separate regressions we show that trading volume increases in the size of the investor base, suggesting a trading channel explanation. We also show that proxies for the portfolio concentration of the largest owners are important. We conclude that ownership structure has major implications for stock return volatility.