An Empirical Analysis Of The Impact Of Institutional Investors On China 's Stock Market Liquidity

In this paper, we examine the impact of institutional ownership on China’s stock market liquidity. Institutional investors have been introduced to capital markets with two important missions:one is to stable capital market; the other is to strengthen corporate governance. Now it has become the dominant force in the market, which has a very profound significance to promote the healthy and stable development of capital market in China, to build a more perfect financial system and to implement national economic development vision. This article first gives a basic description about the liquidity characteristics of Shanghai and Shenzhen Security Exchange and a systematic overview of the participation of institutional investors. Then we use the newest data of Shanghai A-share market from2006-2011to study the relationship between the institutional investors and stock market liquidity.Our empirical results indicate that, first, the divergence of systematic liquidity declined with the increasing proportion of institutional investors. Overall, institutional investors’participation can help stabilize the stock market. However, types of institutional investors matter since they present different influence on systematic liquidity. Second, the rise of institutional investors holding reduces stock trading activity. Our evidence shows that the stock market depth remains to be strengthened. Third, the liquidity of stock can be affected by both adverse selection and information efficiency caused by institutional investors, which leading to a non-linear relationship. Our analysis demonstrates that real friction by trading activity and information friction by institutional ownership both exist in Shanghai A-share Market. Accordingly, we also put forward our suggestions to improve China’s stock market liquidity and to policy makers to regulate the behavior of institutional investors.