Product Market Power And Shareholders Trading Behavior

Stock market is one of the focal points of Chinese academy. The rise of behavior finance has encouraged studies of trading behavior in the view of behavior bias to explain the efficiency of Chinese stock market. Following studies of Campbell et al.(2001), Pastor and Veronesi (2003), Gasper and Massa (2006), Tookes (2008) and Peress (2010), this paper focuses on the impact of product market power on shareholders’trading behavior.Section one investigates the mechanism that product market power influences sharholders’trading behavior. It is found that product market power could reduce firm-specific return volatility, and then uncertainty in trade. And product market power increases heterogeneous beliefs, because shareholders will be more self-confident and insist on their own judgment when uncertainty is reduced.On the basis of section one this paper explores the impact of product market power on shareholders’trading motivation, herd behavior and disposition in trade. Based on the hypothesis of risk-aversion investor, disagreement encourage trade and conclusion of the first section, I believe that product market power can encourage trade. Proofs are given in section two, and I find that product market power improves both turnover and turnover per trade. The analysis of herd behavior is based on the assumption that information asymmetry induces herding. When product market power reduces firm-specific return volatility, information asymmetry alleviated. And improved trading volume implies that trading will convey more information. These all improve the trading environment for shareholders, and reduce herd behavior. Also, the increase of heterogeneous beliefs suggests that shareholders will be less likely to follow others, but behave as they believe. Section three gives empirical proofs. Research on disposition effect is base on the relation between uncertainty and disposition deduced from prospect theory. That is to say, uncertainty induces behavior bias such as disposition effect. Given product market power could reduces uncertainty, it will mitigate disposition. And proofs are given in section four.Next I analysis the impact of product market power on stock market liquidity and the information content of stock price through shareholders’trading behavior. It’s found that the increase of product market power will improve the information content of stock price and stock market liquidity by encouraging trading, information diffusion, and reducing information asymmetry. This impact is significant even when variables of corporate governance are controlled, and the product market power will interact with corporate governance.