Foreign ownership and stock market liquidity

In this study we analyze how the price impact of trades and the bid-ask spread are related to foreign stock ownership using data from 20 emerging markets. We show that while the price impact of trades increases with the percentage of shares held by foreign investors, the bid-ask spread decreases wit...

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Bibliographic Details
Published in:International review of economics & finance 2018-03, Vol.54, p.311-325
Main Authors: Lee, Jieun, Chung, Kee H.
Format: Article
Language:English
Subjects:
Adverse selection component
Foreign investors
G15
G18
G34
G38
Illiquidity
Information asymmetry
Non-information cost of trading
Price impact
Spread
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Summary:In this study we analyze how the price impact of trades and the bid-ask spread are related to foreign stock ownership using data from 20 emerging markets. We show that while the price impact of trades increases with the percentage of shares held by foreign investors, the bid-ask spread decreases with foreign ownership. We interpret these results as evidence that although foreign investors increase adverse selection risks for liquidity providers, they bring net benefit to the market in terms of lower trading costs by increasing competition in the price discovery process. The general increase in foreign ownership in emerging markets after the global financial crisis resulted in higher price impacts and lower spreads. The two-stage least squares regression analysis suggests that our results are unlikely to be driven by reverse causality.
ISSN:1059-0560
1873-8036
DOI:10.1016/j.iref.2017.10.007