Foreign Ownership and Stock Market Liquidity

43 Pages Posted: 13 Feb 2015 Last revised: 20 Oct 2017

See all articles by Jieun Lee

Jieun Lee

The Bank of Korea; Bank of Korea - Economic Research Institute

Kee H. Chung

State University of New York at Buffalo - School of Management

Date Written: October 12, 2017

Abstract

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

Keywords: Foreign investors, Information asymmetry, Price impact, Spread, Adverse selection component, Non-information cost of trading, Illiquidity

JEL Classification: G10, G32, G34

Suggested Citation

Lee, Jieun and Chung, Kee H., Foreign Ownership and Stock Market Liquidity (October 12, 2017). Available at SSRN: https://ssrn.com/abstract=2563154 or http://dx.doi.org/10.2139/ssrn.2563154

Jieun Lee

The Bank of Korea ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794, 100-794
Korea Republic of (South Korea)
82-2-759-5470 (Phone)

Bank of Korea - Economic Research Institute ( email )

110 3-Ga Namdaemunno Jung-Gu
Seoul 100-794
Korea Republic of (South Korea)

Kee H. Chung (Contact Author)

State University of New York at Buffalo - School of Management ( email )

Buffalo, NY 14260
United States
716-645-3262 (Phone)
716-645-3823 (Fax)

HOME PAGE: http://mgt.buffalo.edu/faculty/academic-departments/finance/faculty/kee-chung.html

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