Does Control-Ownership Divergence Impair Market Liquidity in an Emerging Market? Evidence from China

Abstract

This paper examines how institutional characteristics of emerging economies influence the effect of controlownership divergence on market liquidity. We find that the divergence is negatively associated with liquidity and that this negative relationship is more pronounced in firms with more severe agency problems and information asymmetry. We argue that in an emerging market, the negative effect of the divergence on liquidity is worsened by state ownership and poorer shareholder protection, both of which result in more severe agency conflicts; we also find, however, that this effect is alleviated by the NTS reform, which aligns the interest of different shareholders. 2 control-ownership divergence on market liquidity. We find that the divergence is negatively associated with liquidity, and that this negative relationship is more pronounced in firms with more severe agency problems and information asymmetry. We argue that in an emerging market, the negative effect of the divergence on liquidity is worsened by state ownership and poorer shareholder protection, both of which result in more severe agency conflicts; we also find, however, that this effect is alleviated by the NTS reform, which aligns the interest of different shareholders.

Call Auction Transparency and Market Liquidity: Evidence from China

“…Our results suggest that A‐shares that had reformed the split share structure have an overall better market liquidity (lower spreads) in panel A than those without the reform in panel B, which is consistent with Chu et al. (). Nevertheless, liquidity is improved significantly after the transparency reform in both A‐shares with and without split share structure reform, suggesting that our main results are not driven by the share split reform because improved liquidity after the transparency reform is observed even in A‐shares that did not undergo a split share reform.…”

“…) and increasing stock liquidity after the reform (Chu et al. ), so if a firm undergoes a share split reform during our sample period, the better liquidity may be caused by the share split reform rather than the market transparency reform. Therefore, we repeat our study for A‐shares that had reformed their split share structure, and those that had not, during our event period, to see whether the market transparency reform has a similar or different effect on the liquidity of A‐shares that had or had not reformed the split share structure.…”

Corporate governance and stock liquidity dimensions: Panel evidence from pure order-driven Australian market

“…The informed-trading effect indicates that since large shareholders have an incentive to monitor the operations of the firms, they have access to private, valuerelevant information and they may trade on this information to extract private benefits, thus increasing adverse selection costs and reducing stock liquidity (Heflin and Shaw, 2000).The trading-activity effect argues that high ownership concentration is inversely related to trading volume and continuity of order flow because large shareholders trade with lower frequency, leading to wider spreads and lower depth (Kothare, 1997). Both these effects suggest the inverse relationship of ownership concentration with stock liquidity (Chu et al, 2015).…”

Emerging trends in Asia-Pacific finance research: A review of recent influential publications and a research agenda

“…add to this line of enquiry by examining the effectiveness of capital regulation on bank behaviour in China. Furthermore,Chu et al (2015) examine how Chinese institutional characteristics influence the effect of controlownership divergence on market liquidity, finding a negative relationship which is more pronounced in firms with more severe agency problems and information asymmetry. These papers have contributed greatly to our understanding of Chinese markets.…”