Studies find that noise traders create unhedgeable risks, and individuals have long been suspected of making suboptimal and uninformed trading decisions. Recent arguments suggest using the individual trading weight to proxy for noise trader risk when pricing common and preferred stocks in emerging markets. We empirically corroborate that individual traders undermine the relative valuations of listed firms in South Korea. This result is robust to controlling for corporate governance, institutional monitoring efforts, firm size, accounting ratios, idiosyncratic volatility, liquidity measures, and endogeneity.
Bibliographical noteFunding Information:
Special thanks are due to Narjess Boubakri (the Editor), anonymous referees, Warren Bailey, Jonathan Batten, Andrew Karolyi, and Y. Han (Andy) Kim. Part of this research was conducted while P.M.S. Choi and J.H. Choi were visiting scholars at the Samuel Curtis Johnson Graduate School of Management, Cornell University, and were funded by the grant provided by the Fulbright Scholarship Program. This work was supported by the Ministry of Education of the Republic of Korea and the National Research Foundation of Korea (NRF-2019S1A5A2A03053680). We are grateful to Credit Suisse Securities Korea for access to the KOGI database originally provided by the Korea Corporate Governance Service. Yun Joo An and So Hyeon Kang provided excellent research assistance. The authors contributed equally to this work. The standard disclaimer applies, and all errors are our own.
© 2020 Elsevier Inc.
- Firm valuation
- Individual trading weight
- Noise trader risk