Equity characteristics and investor preferences; empirical evidence from Finland and Sweden

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School of Economics | Master's thesis
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The goal of the thesis is to test whether retail investors show preference towards certain type of companies. I compare the similarities between domestic and foreign equity holdings. I add to previous research by analysing also equity mutual funds and testing whether some preferences are seen also there. I use data from a Swedish brokerage company. The data contains the domestic and foreign shareholdings of Finnish retail investors and the foreign shareholdings of Swedish investors. In addition, I was able to get data of the equity mutual fund holdings of these two countries. I combine this unique data set with variables taken form Thomson Financial concerning the individual firms and data collected of the mutual fund equities. I follow the same methodology as earlier research in running regressions on the explanatory variables and classifying the stocks into portfolios. As explanatory variables I test such measures as firm size, leverage, volatility, price-to-book ratio etc. Retail investors show a preference towards smaller sized companies both in the domestic as well as in the foreign shareholdings. Similar type of preference can be noticed also among mutual fund holdings. There the relation is however not linear with respect to equities size and also other variables influence the results, especially the size of fund assets under management. The results are based on using the ownership share in a firm or a fund as the dependent variable, in line with previous research. An earlier study has offered as an explanation the fact that institutional investors show a preference towards large sized companies. My results of mutual fund holdings however do not confirm this as the only reason. Retail investors show a preference towards value stocks in domestic shareholdings, whereas based on the foreign shareholdings the preference was more towards growth stocks. None of the other variables except size seemed to perform consistently well in explaining the observed shareholdings. The second best performing variable was the amount of liquid assets with respect to company market value. One possible reason for this might be that investors invest in companies which have or have had high profitability.
retail investor, preferences, firm characteristics, home bias, small sized stocks
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