Disproportional Ownership Structure and Stock Market Liquidity in China

34 Pages Posted: 5 Jan 2012 Last revised: 2 May 2016

See all articles by Qigui Liu

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University

Xiaojun Chu

Nanjing University of Science and Technology

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: April 9, 2012

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

Suggested Citation

Liu, Qigui and Chu, Xiaojun and Tian, Gary Gang, Disproportional Ownership Structure and Stock Market Liquidity in China (April 9, 2012). 2012 Financial Markets & Corporate Governance Conference. Available at SSRN: https://ssrn.com/abstract=1979820 or http://dx.doi.org/10.2139/ssrn.1979820

Qigui Liu

Department of Finance and Accounting, School of Management, Zhejiang University ( email )

Hangzhou, Zhejiang Province 310058
China

Xiaojun Chu

Nanjing University of Science and Technology ( email )

No.219, Ningliu Road
Nanjing, Jiangsu
China

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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