This study aims to examine the effect of ownership structure on market liquidity. In particular, the first objective of this study is to examine the effect of ownership level and concentration on market liquidity. The second objective of this study is to indicate the effect of owners’ identity on market liquidity. In other words, do different owners’ identities affect market liquidity differently? The definitions and measurements of these variables are provided in this section.
Insider Ownership: This is measured as the sum of executive and non-executive directors (De Cesari & Ozkan 2014; Korczak & Liu 2013; Ozkan 2007; Short & Keasey 1999). For example, Fidrmuc et al. (2006, p.3) define insiders as “member of board of directors of publicly traded corporations that usually possess more information about their company than do (small) outside
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shareholders”. Therefore, this variable is extracted from the BoardEx database since this database provides the number of shares held by executive and non-executive directors on UK boards.
Non-executive Ownership: This variable is measured as the number of shares held by non- executive directors. The measurement of this variable is in line with recent UK studies (Davies et al., 2005; Florackis & Ozkan 2009). In the UK, non-executive directors are employed as part-time directors (Guest 2008). This definition is in line with the BoardEx database definition, which states, “the number of shares held directly by non-executive directors and multiplies by the stock price of the organisation at the Report Date selected”.
Executive Ownership: This variable is measured as the number of shares held by executive directors. The measurement of this variable is in line with recent UK studies (Davies et al., 2005; Florackis & Ozkan 2009). In the UK, executive directors are employed as full-time directors. This definition is in line with the BoardEx database definition, which states, “the number of shares held directly by executive directors and multiplies by the stock price of the organisation at the Report Date selected”.
Institutional Ownership: Evidence in the extant academic literature on institutional investment highlights the importance of the effect of institutional ownership on market liquidity (Agarwal 2007; Cao & Petrasek 2012; Dennis & Weston 2001; Sarin et al., 2000). This study follows the extant literature in the UK and defines institutional ownership as the ratio of the number of shares held by institutional investors to the total number of shares outstanding (Fernandes et al., 2013; Ozkan 2007).
Blockholders: Blockholders are measured as the sum of the stakes of a firm’s shareholders with equity ownership greater than 3% (Florackis & Ozkan 2009; Goergen & Renneboog 2008; Khurshed et al., 2011). For example, Khurshed et al. (2011) state that in the UK, only those investors who own at least 3% of the total shareholding are disclosed in their investee firm’s financial statements.
Large Shareholders: This is measured as the top five large shareholders. Hartzell & Starks (2003) show that this measure is related to the ability of management to monitor. Even though institutional blockholdings are more commonly used, one advantage of the large shareholders measure is that it is not subject to the arbitrary inclusion cut-off point of 5%. Thus, the large shareholders measure is
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a finer measure of concentration if one wants to follow the concentration level of a given firm over time (Ozkan 2007).
However, by following Park (2009), this study measures the identity of controlled shareholders and ordinary investors as follows:
Pension Fund Ownership is measured as pension owners who hold 5% and more of number of shares outstanding at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year.
Employee Ownership is measured as employee blockholders for stock i in year t, which is calculated as employee owners who hold 5% and more of number of shares outstanding at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year.
Cross-Holding Ownership is measured as cross blockholders for stock i in year t, which is calculated as cross owners who hold 5% and more of number of shares outstanding by one company in another at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year.
Foreign Ownershipis measured as foreign blockholders for stock i in year t, which is calculated as foreign owners who hold 5% and more of number of shares outstanding at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year.
Investment Banks’ Ownership is measured as investment bank blockholders for stock i in year t, which is calculated as investment bank owners who hold 5% and more of number of shares outstanding at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year.
Government Ownership is measured as government blockholders for stock i in year t, which is calculated as government owners who hold 5% and more of number of shares outstanding at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year.
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Free Float Ownership is measured asfree float ownership for stock i in year t, which is calculated as free float owners at the end of the fiscal year for stock i in year t over the number of shares outstanding (WC05301) in the same year. This study measures the free float ownership as:
𝐹𝑙𝑜𝑎𝑡% =𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 − 𝑖𝑛𝑠𝑖𝑑𝑒𝑟 𝑜𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Control Variables
The following section provides the definition and measurement of the control variables that are part of the estimations and are included in the empirical models. Each variable has been regarded as an an important determinant of market liquidity. In addition, the measurements and definition of variables used in this study are based on theoretical as well as empirical evidence available in this area of research.
Price Volatility
A considerable amount of the previous literature indicates a positive relationship between the volatility of share price and market liquidity (Benston & Hagerman 1974; Copeland & Galai 1983; Mclnish & Wood 1992; Stoll 1978; Tinic & West 1972). Moreover, Bhushan (1989) and Moyer et al. (1989) suggest that private information is more valuable for firms with higher price variability. The more volatile a firm’s price is, the more uncertain the market maker is of the short-term cost of holding the stock. To protect against price swings, the market maker will increase the spread. Prior studies have confirmed this idea with evidence of a positive relationship between price variance and the spread (Jegadeesh & Subrahmanyam 1993; Stoll 1978). In this study and consistent with previous studies, volatility of share price is measured as standard deviation of daily returns.
Share Price
The firm’s stock price is mechanically associated with percentage of bid-ask spread. In addition, stocks with low prices face higher than usual bid-ask spread because of discreteness in tick sizes (Jegadeesh & Subrahmanyam 1993; Welker 1995). Stoll (1978) suggests that the minimum allowable of bid-ask spread of £1/8 can cause low-priced stocks to have artificially high bid-ask spread. On the other hand, Brennan & Hughes (1991) state that the level of the stock price is related to a firm’s market liquidity, since it controls for price discreteness and also acts as a proxy for firm
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risk; that is, low prices are associated with higher risk (Stoll 2000). Thus, this study measures the annual stock price using the average of the daily closing prices.
Firm Size
Firm size has been identified as an important measure in previous literature. In this regard, Anderson & Fraser (2000).suggest that due to their access to capital markets, larger firms are expected to have higher market liquidity. Additionally, larger firms, on average, release more information than smaller firms release and had more analyst following and are thus subject to more scrutiny by the investment community than smaller firms (Brennan & Subrahmanyam 1995). By following previous literature, this study measures firm size by market capitalisation defined as the total number of shares outstanding multiplied by price at the end of each day (Brockman et al., 2009; Chiang & Venkatesh 1988; Heflin & Shaw 2000; Jacoby & Zheng 2010; Kini & Mian 1995).