Ownership Concentration, Blockholder Types and Stock Market Liquidity

Abstract

We examine the relation between market liquidity and ownership concentration and the effect of different types of blockholders on stock market liquidity in Germany. For the overall sample high ownership concentration is negatively related to market liquidity as measured by an order-size-dependent volume-weighted spread measure, which is called Xetra liquidity measure (XLM). This is due to an information asymmetry problem, as large shareholders possess economies of scale in the collection of information or have access to private, value relevant information and may trade on this information to extract the private benefits of control. Our major objective is to scrutinize the effect of specific types of shareholders on market liquidity. We found that most blockholder types, but most importantly insider blockholders, have a deleterious effect on the market liquidity. However, we show that on the other hand private blockholders and majority strategic blockholders alleviate the information asymmetry. This may be due to the fact that they don't have access to private information, can't leverage economies of scale in the information acquisition, or that they simply don't engage in information based trading, as they are usually long-term investors. Hence, private and to some extent strategic blockholders are able to improve stock market liquidity. We therefore are able to show that the often propagated trade-off between liquidity benefits obtained through dispersed corporate ownership and the benefits from efficient management control achieved by some degree of ownership concentration doesn't hold for all blockholder types.

Keywords: Liquidity Costs, Asset Liquidity, Market Liquidity, Price Impact, Weighted Spread, Xetra Liquidity Measure (XLM), Ownership Concentration, Blockholders, Insider Ownership, Information Asymmetry

JEL Classification: G14, G32