Ownership Structure And Liquidity: Evidence From China Stock Market

Previous literatures have delivered a host of contributions to the issues concerning ownership structure and corporate performance relationships. While foreign scholars have made advances on the study of ownership structure and liquidity relationship, domestic academicians almost all tend to neglect to take market liquidity -- the key intermediate variable affecting both ownership structure and performance– into serious account. In light of the fact that China stock market demonstrates low level of liquidity, this paper, for the very first time takes the liquidity as a function of ownership structure rather than an exogenous variable. The paper has made the first efforts to look into the interaction between ownership structure and liquidity in an attempt to answer two fundamental questions:①What kind of relationship the ownership structure and liquidity hold? And②what kind of governance structure serves the best interest of an improved liquidity? Centering on these two issues, the paper moves on to:①Review and clarify liquidity measurement models appropriate for China stock market through a"four dimension perspective"approach, which include but is not limited to relative bid ask spread, quoted depth, composite liquidity and information asymmetry as the component of bid ask spread;②Survey relevant literature concerning the topic, thus narrowing and dwelling down the domain of issues this paper intends to address;③Examine the relationship of ownership structure and liquidity using recent sample and data from Shanghai Stock Exchange, which reveals that: 1) institutional ownership has a positive impact on liquidity, by tightening bid ask spread, deepening quoted depth, and mitigating information asymmetry in the market trading; 2) insider ownership, represented largely by state ownership and legal person's ownership, has a positive impact on liquidity cost, measured by information asymmetry, although bears no significant relationship with liquidity measurements; and 3) ownership diffusion rather than concentration seems to be the optimal governance pattern for China listed companies; 4)By accounting for the endogenous feature of ownership structure through a two-step procedure, the conclusions are still robust for 1) to 3) .④Last but not the least, put out advice for policy makers in line with the results, which includes: 1) consolidate the power of institutional investors to facilitate liquidity improvement mechanism in the stock market; 2) the impact of state ownership and corporate legal person's ownership on market liquidity is a judgmental call yet to be further tested, and their positive influence on reducing liquidity cost shall be taken to the best of it; and 3) ownership diffusion as the desirable corporate governance pattern shall be proactively promoted.