| There is great variation in the structure of corporate ownership. Whereas some firms have a small number of domestic owners, others have a more diversified structure with institutional investors, private equity, business spheres, and foreign owners as a significant part of the ownership. Some firms have a large fraction of small investors, whereas others are dominated by a smaller number of relatively large ownership blocks. The questions we address in this article are whether stock return volatility is determined by what kind of investors the firm has and how many they are, which is hereafter referred to as the shareholder base. Previous literature has noted the central importance of stock return volatility to financial theory, as well as for practitioners in the investor community (e.g. Campbell, Lettau, Malkiel, and Zu, 2001; Zhang, 2010). We contribute to this literature by examining shareholder base determinants of volatility. Our inquiry is motivated by an intriguing conjecture in the literature which holds that volatility decreases in the size of the firm’s shareholder base. According to Wang (2007), the shareholder base-broadening effect occurs because each individual has only partial information about the firm. As the number of investors grows the accuracy of the information available about the stock increases, which in turn lowers the variance of stock returns. This follows from an extension of the Merton (1987) analysis of investor recognition, according to which a small shareholder base leads to higher expected returns because risks are insufficiently shared among investors. While the importance of the shareholder base is hinted at in several papers it has not yet, to our knowledge, been comprehensively investigated empirically (Merton, 1987; West, 1988; Wang, 2007; Rubin and Smith, 2009; Li, Nguyen, Pham, and Wei, 2011). This study fills this gap. |