Investor Composition and Liquidity: An Analysis of Japanese Stocks

39 Pages Posted: 14 Aug 2012 Last revised: 23 Aug 2014

See all articles by Hao Jiang

Hao Jiang

Michigan State University

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Takeshi Yamada

Australian National University (ANU)

Date Written: August 2014

Abstract

In the late 1990s, the Japanese government initiated a number of reforms that resulted in lower transaction costs and made the Japanese equity market more attractive for foreign institutions. Following these changes, foreign institutional holdings more than doubled, providing an opportunity to study how changes in the composition of investors affect market liquidity. Our analysis of a panel of firm-level ownership data indicates that Japanese stocks that are held more by foreign institutions tend to trade more actively, but are less liquid as measured by their quoted and effective bid-ask spreads, their short-term idiosyncratic volatilities and return reversals. To address endogeneity concerns we use index membership, the number of English news stories about Japanese companies, and their export to sales ratios as instruments for changes in foreign institutional holdings. We find that over the entire sample period, spreads and return reversals decrease less and idiosyncratic volatilities increase more for those stocks with higher foreign holdings.

Keywords: Liquidity, Foreign Institutions, Japan, Bid-Ask Spreads

JEL Classification: G10, G12, G14, G15

Suggested Citation

Jiang, Hao and Titman, Sheridan and Yamada, Takeshi, Investor Composition and Liquidity: An Analysis of Japanese Stocks (August 2014). Available at SSRN: https://ssrn.com/abstract=2129417 or http://dx.doi.org/10.2139/ssrn.2129417

Hao Jiang (Contact Author)

Michigan State University ( email )

315 Eppley Center
Department of Finance
East Lansing, MI 48824
United States

HOME PAGE: http://sites.google.com/site/haojiangfinance/

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Takeshi Yamada

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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