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Block Ownership, Trading Activity, and Market Liquidity

Published online by Cambridge University Press:  08 October 2009

Paul Brockman ,
Dennis Y. Chung  and
Xuemin (Sterling) Yan
Paul Brockman
Affiliation:
College of Business and Economics, Lehigh University, 621 Taylor St., Bethlehem, PA 18015. [email protected]
Dennis Y. Chung
Affiliation:
Faculty of Business Administration, Simon Fraser University, 8888 University Dr., Burnaby, BC V5A 1S6, Canada. [email protected]
Xuemin (Sterling) Yan
Affiliation:
Trulaske College of Business, University of Missouri–Columbia, 427 Cornell Hall, Columbia, MO 65211. [email protected]
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Abstract

We examine the impact of block ownership on the firm’s trading activity and secondary-market liquidity. Our empirical results show that block ownership takes potential trading activity off the table relative to a diffuse ownership structure and impairs the firm’s market liquidity. These adverse liquidity effects disappear, however, once we control for trading activity. Our findings suggest that block ownership is detrimental to the firm’s market liquidity because of its adverse impact on trading activity—a real friction effect. After controlling for this real friction effect, we find little evidence that block ownership has a negative impact on informational friction. Our results suggest that the relative lack of trading, and not the threat of informed trading, explains the inverse relation between block ownership and market liquidity.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 6 , December 2009 , pp. 1403 - 1426
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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