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.