Informed Trading in Business Groups, Ownership Concentration, and Market Liquidity

38 Pages Posted: 19 Jul 2016

Date Written: May 31, 2016

Abstract

Business groups, which are collections of publicly traded companies with significant amount of common ownership, dominate private sector activity in developing countries. This paper studies how information flows within these groups by analyzing the trading behavior of pension fund managers in firms that belong to the same group. The paper shows that while pension fund managers are momentum traders on non-affiliated companies, they trade in anticipation of future abnormal returns in affiliated firms. Ownership concentration and business group ties exacerbate information asymmetries, discouraging investment and depressing stock market participation. Using the merger and acquisition activity among pension fund managers as a natural experiment, the paper provides evidence that increases in stock ownership concentration, via the threat of informed trading, adversely affect liquidity. The results indicate that cross-ownership structures and extensive investor-industry relations might curb the expected benefits from the presence of institutional investors, limiting market development.

Keywords: Securities Markets Policy & Regulation, Corporate Governance, Non Bank Financial Institutions, Capital Flows, Civic Participation and Corporate Governance, Capital Markets and Capital Flows, Multinational & Corporate Governance

Suggested Citation

Leano, Miguel and Morales, Alvaro, Informed Trading in Business Groups, Ownership Concentration, and Market Liquidity (May 31, 2016). World Bank Policy Research Working Paper No. 7688. Available at SSRN: https://ssrn.com/abstract=2811335

Miguel Leano (Contact Author)

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Alvaro Morales

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
35
Abstract Views
315
PlumX Metrics