Are retail investors liquidity providers? Evidence from the STAR and ChiNext markets in China

Liquidity is the cornerstone of capital market. In China's stock market, the highly-placed Science and Technology Innovation Board (STAR) market, relative to the renewed Shenzhen Growth Enterprise (ChiNext) market, has become increasingly illiquid since its launched in 2019. To uncover the reason behind, we use the difference in capital threshold for retail investors between the two boards as a quasi-natural experiment, and explore the role of retail investors on stock liquidity. The results show that: (i) Overall, the stock liquidity in STAR market is significantly poorer than that in ChiNext market. (ii) Retail investors are liquidity providers in the STAR and ChiNext markets. The more retail investors in markets, the more active trading and higher liquidity there are. This relationship is more pronounced in the STAR market than in the ChiNext market. Our findings remain robust to a series of tests, such as alternative sample interval and sample matching. Overall, the findings in this paper deepen our understanding of the role of retail investors and their influence on stock liquidity. It benefits practitioners, scholars and policy makers alike.