Foreign Institutional Ownership and Stock Market Liquidity: Evidence from Indonesia

34 Pages Posted: 20 Mar 2008 Last revised: 15 Jan 2010

See all articles by S. Ghon Rhee

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Jian-Xin Wang

University of Technology Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2008

Abstract

From January 2002 to August 2007, foreign institutions held almost 70% of the free-float value of the Indonesian equity market, or 41% of the total market capitalization. Over the same period, liquidity on the Jakarta Stock Exchange improved substantially with spread more than halved and depth more than doubled. Was the high foreign institutional ownership a major contributing factor to the improvement? In this study we examine the Granger causality between foreign institutional ownership and liquidity. The direct and indirect effects of foreign institutions on liquidity measures are estimated using monthly Fama-McBeth regressions. We find that foreign preference for liquidity, though statistically significant, is economically small. However, their holdings have a negative impact on future liquidity: a 10% increase in foreign institutional ownership in the current month is associated with approximately 2% increase in the bid-ask spread, 3% decrease in depth, and 4% rise in price sensitivity in the next month. The liquidity effects of domestic institutions are mixed but more positive. The findings are consistent with the negative liquidity impact of institutional investors in developed markets, and challenge the view that foreign institutions enhance the liquidity in small emerging markets.

Keywords: foreign institutions, foreign ownership, liquidity, bid-ask spread, depth, price impact

JEL Classification: G14, G15, F36

Suggested Citation

Rhee, S. Ghon and Wang, Jian-Xin, Foreign Institutional Ownership and Stock Market Liquidity: Evidence from Indonesia (January 1, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1086590 or http://dx.doi.org/10.2139/ssrn.1086590

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Jian-Xin Wang (Contact Author)

University of Technology Sydney ( email )

UTS Business School
Finance Decipline
Sydney, NSW
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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