Disproportional Ownership Structure and Stock Market Liquidity in China

Abstract

This paper examines the effect that disproportional ownership has on stock market liquidity using a sample of Chinese listed firms. We find that the controlling shareholders’ excess control rights are negatively associated with market liquidity. We also provide evidence to show that the negative relationship between disproportional ownership and liquidity is stronger when the firms’ ultimate owner is the state or where legal protection for minority shareholders is weak; both of which result in a more severe agency problem. In addition, we find that as more non-tradable shares by controlling shareholders became tradable, the negative effect of disproportional ownership on liquidity became less. This relationship between disproportional ownership and liquidity remains even when the trading activities of controlling shareholders are controlled. We argue that in transition economies such as China, controlling shareholders usually have a strong incentive to disclose poor information in order to pursue their private benefit, which reduces market liquidity, while state ownership and weak shareholder protection makes this situation worse.

Keywords: Disproportional ownership, excess control right, market liquidity

JEL Classification: G1, G32, G34