Number of shareholders and stock prices: Evidence from Japan

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum tra ding unit-the number of shares in a "round lot"-which facilitates trading i n the stock by small investors. We find that a reduction in the minimum tra ding unit greatly increases a firm's base of individual investors and its s tock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an in crease in the number of shareholders.