Macquarie University
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The power of retail investor attention in the Chinese stock market

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posted on 2023-11-09, 05:06 authored by Feiyang Cheng

Information is decisive for the behavior of asset prices in financial markets. Traditional financial theory suggests that market investors with Bayesian rationality are capable of adequately accessing and processing information to make rational investment decisions. However, there is substantial theoretical research suggesting that retail investors, who occupy an important position in the market, are unable to pay attention to all information available in the market due to time and energy constraints, this is known as the “limited attention theory”. A growing body of literature in finance suggests that the attention of retail investors has a significant impact on their information processing, trading behavior and equilibrium asset prices. In this context, retail investor attention and the resulting behavioral biases provide important references for behavioral finance theory to explain a range of market anomalies.

Existing studies on retail investor attention mostly focus on developed capital markets. In markets with a high share of retail investors, strong market volatility and strict government regulations, like China, whether and how retail investor attention impacts financial market still needs further analysis. At the same time, the avenues for retail investors to express their opinions have expanded in recent years against the background of rapid development of Internet technology and “self-media”. Thus, the impact of this attention and retail investors’ trading behavior on the capital market continues to deepen. This thesis aims to explore the market power of retail investor attention and its internal mechanisms. Focusing on three dimensions, that is, whether retail investor attention changes stock liquidity, whether it will increase market volatility, and whether it will boost market consequences of stock price manipulation, the main research contents of the thesis are as follows:

In the first part, the market power of retail investor attention is explored by considering changes in stock liquidity. I measure retail investor attention using Internet opinion data and construct stock liquidity measures including relative effective spreads from intra-day high-frequency trading data. Then, I compare the short- and long-term effects of retail investor attention on stock liquidity and the economic mechanisms. The results show that, first, retail investor attention significantly enhances stock liquidity in the short run, while this effect diminishes and eventually reverses in the long run. Second, using the so-called “Dragon and Tiger List” as an exogenous attention-grabbing event, the thesis shows that the abnormal increase in retail investor attention induces net buying behavior. More importantly, sophisticated market participants, such as insider and informed traders, act as counterparties to retail investors. The above findings still hold after a series of robustness tests, such as excluding the effect of announcement effects and conducting event analysis using upper price limits. Finally, I explore the asymmetry of the effect of retail investor attention on stock liquidity for various market states and firm characteristics. The findings suggest that the retail investor attention effect is more pronounced in firms with low-quality disclosures in periods of high uncertainty.

In the second part, I consider the role of retail investor attention on the exacerbation of market risk in relation to stock price crash risk. I combine stock market opinion data and stock trading data to construct a comprehensive index, and explore the impact of retail investor attention on stock price crash risk and its potential mechanisms. The findings show that retail investor attention significantly exacerbates future stock price crash risk, and the effect remains significant after controlling for a series of robustness tests, including multiple fixed effects, and addressing endogeneity concerns. Further analysis shows that the effect of retail investor attention on stock price crash risk is more pronounced for firms with high levels of information uncertainty and when the market is in a more optimistic state. In the mechanism analysis, the thesis examines how retail investor attention can push up stock prices by exacerbating investors’ short-term net buying behavior, using data from the “Dragon and Tiger List”. Finally, this thesis makes a comparative analysis of the changes in the retail investor attention effect during the evolution of short selling mechanism. The research conclusion shows that the improvement of market system and mechanism can help restrain the negative impact of retail investor attention on the market.

In the third part, stock price manipulation is used as a constraint to dissect how retail investor attention contributes to the negative market consequences of this manipulation. Using announcements concerning opening price manipulation and spoofing events on the official website of the Chinese Securities Regulatory Commission, the thesis examines three aspects of the effect of stock price manipulation on market stability: stock liquidity, volatility, and price efficiency. It also examines the contributing effects of retail investor attention, retail investor sentiment, and retail trades on the effect of stock price manipulation. The empirical results show that stock price manipulation significantly reduces the liquidity and price efficiency of the manipulated stocks, increases their volatility, and ultimately, has a negative impact on market stability. Further, the difference-in-differences estimations indicate that the manipulated stocks become less liquid, more volatile, and less efficiently priced during the manipulation period compared to the pre-manipulation period and cannot recover to the pre-manipulation level within a certain period after the manipulation. The analysis of potential mechanisms suggests that manipulation leads to an abnormally high level of retail investor attention. Further, stock price manipulation and the resulting abnormal changes in retail investor attention push up retail investor sentiment, increasing retail net-buys. Additionally, higher corporate information transparency helps dampen the adverse effects of stock price manipulation on stock market stability.

The above conclusions add to the discussion on the effect of retail investor attention in emerging capital markets represented by the Chinese stock market and provide a theoretical basis for understanding the market influence of retail investor attention and retail investors’ trading behavior in China’s stock market in the Internet era. Meanwhile, the thesis provides practical reference for the regulators to effectively guide retail investor attention, actively cultivate institutional investors, improve the construction of capital market institutions and mechanisms, and curb illegal and unlawful behaviors.


Table of Contents

1. Introduction -- 2. Important Measurements and Theoretical Foundations -- 3. Literature Review and Discussions -- 4.Does Retail Investor Attention Change Stock Liquidity? A Dynamic Perspective -- 5. Does Retail Investor Attention Exacerbate Market Risk? -- 6.Does Retail Investor Attention Exacerbate the Negative Effects of Stock Price Manipulation? -- 7. Conclusions and Policy Implications -- References -- Appendix

Awarding Institution

Macquarie University

Degree Type

Thesis PhD


Doctor of Philosophy

Department, Centre or School

Department of Applied Finance

Year of Award


Principal Supervisor

Jing Shi

Additional Supervisor 1

Qing Zhou

Additional Supervisor 2

Chungfeng Wang


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195 pages

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