Ownership Structure and Stock Market Liquidity

Abstract

We empirically examine the relationship between liquidity and the fraction of the firm owned by insiders and institutions. The bid-ask spread is a direct cost of transacting and we use it as one measure of stock liquidity. Lee, Mucklow and Ready (1993) point out that, in addition to bid-ask spread, quoted depth is also part of the stock market quote and that specialists actively manage adverse selection risk by adjusting both spread and depth. We find that both higher insider and institutional ownership are associated with wider spread and smaller quoted depth. Our results also suggest that for higher insider ownership the loss of liquidity is a consequence of adverse selection costs and for higher institutional ownership is a result of higher inventory carrying costs.

JEL Classification: G12, G32