Domestic Retail Investors’ Participation and Stock Price Efficiency in Nigeria

Abstract

This study tests whether retail behaviour affects the stock price and pricing efficiency of stocks on the Nigerian Stock Exchange (NSE) using data on equity from retail investors' market transactions. The Delong, et al. (1990) model is used to measure retail mispricing and stock price efficiency, whereas the Least Squares (LS) and Generalised Least Square (GLS) techniques are used to estimate the static and probability distributed lag (PDL) models. The study finds that in the short run, temporary retail mispricing impacts stock prices and positively affects stock price efficiency. Hence, retail investors’ pricing behaviour benefits the equity market in the short-run, but not in the long run. Thus, for sustaining the efficiency of prices in the NSE, retail investors should participate in the equity market and investor literacy programs to enhance their trading skills, which would reduce their losses and enhance their survival in the market over the long term.

Keywords: retail investors, equity price, price efficiency, stock market, Nigeria.

JEL Classification: D53, G12.