State Ownership and Stock Liquidity: Evidence from Privatization

Abstract

We provide the first firm-level evidence of the relation between state ownership and stock liquidity. Using a broad sample of newly-privatized firms (NPFs), our study identifies a non-monotonic association between state ownership and stock liquidity. The inverse U-shaped relation is consistent with trade-offs between costs and benefits of state ownership and suggests an optimal level of government shareholdings that maximizes stock liquidity of NPFs. We further identify that the inflection point from the cost/benefit trade-off is contingent upon characteristics of the nation’s institutional environment. We also determine that stock liquidity is a channel through which state ownership affects firm value.

Keywords: Privatization, government ownership, stock liquidity, valuation, cost of capital

JEL Classification: G32, G34, G35