Investor heterogeneity and commonality in stock return and liquidity

•We examine investor heterogeneity and commonality in stock return and liquidity.•Institutional trades contribute more than retail trades to liquidity commonality.•We observe that retail trades contribute more strongly to return co-movement. This paper examines how the trading activities of different investor types are related to common return and liquidity movements. Using a unique dataset, we decompose the daily return and liquidity of individual stocks into price impact components attributable to trades of institutional investors and retail investors. We then investigate the variation of each component relative to market-wide return and liquidity. We show that institutional trades contribute more than retail trades to liquidity commonality. However, retail trades contribute more strongly to return co-movement. The incremental contribution of retail trades to the co-variability of stock returns is more pronounced for firms with high information asymmetry.