Purpose – The purpose of this paper is to examine the effect of institutional investors’ ownership and type on information asymmetry and stock market liquidity in France. Design/methodology/approach – The sample includes 162 French-listed firms from 2007 to 2009. The methodology relies on linear regressions using the method of ordinary least square. Before examining the interaction between liquidity and institutional investors, the authors check for the existence of the endogeneity problem by applying the Durbin-Wu-Hausman test of Davidson and MacKinnon (1993). The results of the endogeneity test show that institutional investors’ ownership and stock liquidity are endogenous. A simultaneous equation model using the double least square method is then tested to address this problem. Findings – The findings show that the proportion of institutional investors has a positive and significant effect on stock-market liquidity, which confirms the signal theory and trading hypothesis. These investors perform high trading activity which favorably affects market liquidity. The results also show that pension funds improve stock liquidity. This result suggests that pension funds manage huge assets decreasing transaction costs and improving liquidity. They display a positive signal to the market about more transparency and a low level of informational asymmetry. Practical implications – These results highlight the institutional investors’ role in defining the level of liquidity on the French market. The findings also stress the relevance of developing institutional investors’ demand for the Paris market in order to better assess firm value, protect minority ownership and improve market liquidity. Originality/value – In the French institutional setting, institutional investors act as a control device since minority shareholder interests are less protected than in Anglo-American counterparts. This result highlights the significant role of institutional investors in corporate governance structures and on financial markets. Their presence is a guarantee for minority interest protection and for more liquid stocks.

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Abstract:In this paper, we investigate the empirical relationship between corporate governance and information asymmetry across a range of French firms. Based on a cross-sectional analysis, our study of the empirical relationship between corporate governance and information asymmetry involved 160 companies over the years [2008][2009][2010]. Mechanisms of corporate governance include the characteristics of the board of directors.Our results seem to indicate a significant relationship between certain mechanisms of corporate governance and the information asymmetry of the French market. These mechanisms can reduce adverse selection costs, and make exchanges more transparent. These results suggest that firms with efficient corporate governance mechanisms may reduce informative asymmetry and improve transparency between investors.