Block Ownership, Trading Activity, and Market Liquidity

Journal of Financial and Quantitative Analysis (Impact Factor: 1.77). 12/2009; 44(06):1403-1426. DOI: 10.2139/ssrn.1117285
Source: RePEc


We examine the impact of block ownership on the firm s market liquidity. These adverse liquidity effects disappear, however, once we control for trading activity. Our findings suggest that block ownership is detrimental to the firm a real friction effect. After controlling for this real friction effect, we find little evidence that block ownership has a negative impact on informational friction. Our results suggest that the relative lack of trading, and not the threat of informed trading, explains the inverse relation between block ownership and market liquidity.

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Available from: Paul Brockman
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    • "For example, our finding show consistent results when use employ the research and development expenses and the firm age beside other control variables that used in the main analysis. Finally, we suggest applying this study to different trading pattern within the market microstructure area, for example (floor versus electronic mechanism) as stated previously byBrockman et al. (2009). "
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    ABSTRACT: We examine the impact of ownership structure on the firm’s trading activity and secondary market liquidity. Our empirical results show that insider, large shareholders and blockholders take potential trading activity off the table relative to institutional investors and impair the firm’s market liquidity. These adverse liquidity effects appear, however, once we control for trading activity. Our findings suggest that insider, large shareholders and blockholders are detrimental to the firm’s market liquidity because of their positive impact on adverse selection costs of market liquidity - information friction effect. Nevertheless, we conclude that institutional investors have a positive impact on real friction of market liquidity. Our results suggest that the relative frequent of trading explore the positive relation between institutional investors and market liquidity.
    Full-text · Conference Paper · Mar 2015
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    • "Further, those studies indicate that surrogates of information, for example, trade size and market structure (order vs. quote) affect spread and its components. Kini and Mian (1995), Heflin and Shaw (2000), Chung and Charoenwong (1998), Fehle (2004), Jiang and Kim (2005), Rubin (2007), Schnatterly et al. (2008), Brockman et al. (2009), Jiang et al. (2011) find mixed evidence on the effect of block and insider holding, and changes in institutional holding on spread and its adverse selection component. Sias et al. (2006), Griffin et al. (2003), and Kaniel et al. (2008) find evidence of informed trading by institutions while Easley et al. (1996) find PIN, the information content in trades determined from excess buys and sales to be a significant determinant of spread. "
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    ABSTRACT: We use transactions data from TORQ and present empirical evidence on the cross sectional relation between institutional trading and effective spread after controlling for trading volume denoting inventory and order processing costs and probability of informed trading (PIN) denoting risk of informed trading. We find that volume, information risk premium denoted by PIN times price, and institutional trading are significant determinants of bid ask spreads for a sample of 65 NYSE listed securities. We also find that institutional trading increases the adverse selection component but does not have a significant effect on order processing costs. The net effect of institutional trading on spread depends on the dominant effect, information increasing adverse selection costs or liquidity decreasing order processing costs. In our sample the increase in adverse selection costs trumps the decrease in order processing costs and as a consequence spread increases as institutional trading rises.
    Full-text · Article · Dec 2012 · Journal of Economics and Finance
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    • "For instance, variable SHCAP (Capital rights of the controlling shareholders) disclose an average of 0.26 for the USA, which is consistent with the concentration of 0.20 observed by La Porta et al. (1998, p. 1147-1148) on the sole 3 largest shareholders amongst the 10 largest listed firms of the country. It has also been noticed that block ownership plays an increasingly important role in U.S. capital markets (Brockman et al. 2009). Dlugosz, et al. (2006) find that block ownership increased from 21.7% of outstanding shares in 1996 to 25% in 2001 in their sample of over 1,900 relatively large firms. "
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    ABSTRACT: Minority expropriation could result when controlling shareholders can expropriate minority shareholders and profit from private benefits of control. This agency conflict (named Type II) has been rarely studied, as the most commonly assumed agency conflict resides between managers and shareholders (Type I). We want to study the role of the auditors in reducing the type II agency conflict. Using an audit fees model derived from Simunic (1980), we study the impact of type I and type II agency conflicts on audit fees in code law vs common law countries. We then focus two civil law countries (Germany and France) providing a lower investor protection level, and two common law countries (the USA and UK) providing a higher investor protection level (La Porta et al. 1998, 2000). Our results show 1) a negative relation between audit fees and managerial shareholding, which is stronger for common law than for civil law countries; 2) a curvilinear (concave) relation between audit fees and controlling shareholding for civil law countries; 3) no Type II conflict in the common law countries. These results illustrate the mixed effects of the legal environment and of each agency conflict on audit fees.
    Full-text · Article · Jul 2011
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