Local equity market participation and stock liquidity

This paper investigates the relationship between local equity market participation and stock liquidity. We use county-level racial composition as a proxy for local retail participation. We find that stocks headquartered in counties with a higher white percentage are more liquid. This effect is stronger among stocks with a high retail concentration (i.e., small size, low institutional ownership, low price). Our findings support Admati & Pfleiderer (1988. Review of Financial Studies, 1, 40). that noise trading increases liquidity under endogenous informed trading, i.e., the impact on liquidity is stronger when there are more institutional investors located nearby, especially the ones with “small” investment styles and “transient” trading styles.