Investcafe Independent Research

Grigory Birg, co-director of research at Investcafe The case for expanding retail investor base of Russian public companies

Main points of this presentation Retail investors increase the capitalization by bringing liquidity to the stock Russian capital markets will see a rise in retail investor stock market participation Public companies will have to manage their retail investor base, but through different communication compared with the institutionals

What makes a retail investor? Individual investors who buy and sell securities for their personal account and not for another company or organization Retail investors: Trade in small lots Trade more frequently Follow publicized news Do not “buy & hold” Require a dedicated IR channel

Liquidity is key to capitalization… in theory* *Yakov Amihud and Haim Mendelson, 1986, “Asset Pricing and the Bid-Ask Spread,” Journal of Financial Economics 17, Liquidity costs are the costs associated with executing a transaction in the capital markets Required return on a stock is an increasing function of its liquidity costs

Liquidity and capitalization: evidence Companies with greater stock liquidity have higher P/E ratios* The price of restricted stock is 34% lower, than the price of the corresponding publically traded stock** When companies take actions designed to increase the liquidity of their own equity, investors’ required returns fall and the market value of the firm increases*** *Claudio Loderer and Lukas Roth, 2005, The pricing discount for limited liquidity: evidence from SWX Swiss Exchange and the Nasdaq, Journal of Empirical Finance 12, **William L. Silber 1991, Discounts on restricted stock: The impact of illiquidity on stock prices. Financial Analysts Journal 47, 60– 64.***Yakov Amihud, Haim Mendelson and Beni Lauterbach, 1997, Market microstructure and securities values: evidence from the Tel Aviv Exchange, Journal of Financial Economics 45, Price change, % Number of days since liquidity increased

Enter the retail investor! A company can reduce its cost of capital and increase its market value by increasing the liquidity of its equity Must increase investor base by adding smaller, less informed investors Greater trading activity by retail investors reduces bid-ask spreads and price impact of trades => higher stock price Reducing the minimum trading unit or lot size and stock splits increase the number of investors and liquidity => higher stock price The increase in the stock price is the an increasing function of the percentage increase in the number of retail shareholders* *Yakov Amihud, Haim Mendelson and Jun Uno, 1999, Number of shareholders and stock prices: Evidence from Japan, Journal of Finance 54,

The past, present and future of the retail investor in Russia “People’s IPOs” Multi-billion dollar privatization program Growing number of individual investors Russian equity markets development and greater population participation in the stock market Increasing importance of the retail investor base for companies that are public or considering to go public

The need to communicate with the retail investor Advertising is a way of increasing a company’s investor base and capitalization Greater transparency and retail investor-friendly IR communications are required By voluntarily providing more information companies can lower the required cost of equity capital increase the price of their stock* Public information provided by additional equity analysts helps to increase liquidity** *Botosan, Christine, 1997, Disclosure levels and the cost of equity capital, The Accounting Review 72, and K. Raman and Niranjan Tripathy, 1993, The effect of supplemental reserve-based accounting data on the market microstructure, Journal of Accounting and Public Policy, 12, ** Michael J. Brennan and Avanidhar Subrahmanyam, 1995, Investment analysis and price formation in securities markets, Journal of Financial Economics 38, 361–81. and

Retail investors require an innovative approach to IR Growing significance of minority investors as “opinion leaders” Social Media – an important source of information Public companies cannot ignore perceptions of the retail investor community Need to communicate with the retail investors

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