Foreign Institutional Ownership and Stock Market Liquidity: Evidence from Indonesia

38 Pages Posted: 15 Jul 2009

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 2009

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 the average bid-ask spread more than halved and the average depth more than doubled. In this study we examine the Granger causality between foreign institutional ownership and liquidity, while controlling for persistence in foreign ownership and liquidity measures. We find that foreign 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, challenging the view that foreign institutions enhance liquidity in small emerging markets. Our findings are consistent with the negative liquidity impact of institutional investor ownership in developed markets.

Keywords: Foreign investors, Foreign institutions, Foreign ownership, Foreign trading, Market liberalization, Liquidity, Bid-ask spread, Depth, Price sensitivity, the Jakarta Stock Exchange, Granger causality

JEL Classification: F32, F36, G12, G15

Suggested Citation

Rhee, S. Ghon and Wang, Jian-Xin, Foreign Institutional Ownership and Stock Market Liquidity: Evidence from Indonesia (January 2009). Journal of Banking and Finance, Vol. 33, No. 7, 2009. Available at SSRN: https://ssrn.com/abstract=1434291

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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