Block Ownership, Trading Activity, and Market Liquidity

40 Pages Posted: 8 Apr 2008

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Dennis Y. Chung

Simon Fraser University

Xuemin Sterling Yan

University of Missouri - Columbia

Date Written: March 1, 2008

Abstract

We examine the impact of block ownership on the firm's trading activity and secondary-market liquidity. Our empirical results show that block ownership takes potential trading activity off the table relative to a diffuse ownership structure and impairs 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's market liquidity because of its adverse impact on trading activity - 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.

Keywords: Block ownership, liquidity; bid-ask spreads, depths, adverse selection

JEL Classification: G10, G32

Suggested Citation

Brockman, Paul and Chung, Dennis Y. and Yan, Xuemin Sterling, Block Ownership, Trading Activity, and Market Liquidity (March 1, 2008). Available at SSRN: https://ssrn.com/abstract=1117285 or http://dx.doi.org/10.2139/ssrn.1117285

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Dennis Y. Chung

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Xuemin Sterling Yan (Contact Author)

University of Missouri - Columbia ( email )

Robert J. Trulaske Sr. College of Business
427 Cornell Hall
Columbia, MO 65211-2600
United States
573-884-9708 (Phone)
573-884-6296 (Fax)

HOME PAGE: http://business.missouri.edu/yanx/

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