Corporate Shareholdings and the Liquidity of Malaysian Stocks: Investor Heterogeneity, Trading Account Types and the Underlying Channels

Abstract

Abstract:This paper examines the relationship between shareholdings of various investor groups and stock liquidity for Malaysian public listed firms over the [2002][2003][2004][2005][2006][2007][2008][2009] sample period. Using the Amihud illiquidity ratio, we extend the literature by addressing the issues of investor heterogeneity, trading account types and the interactions of competing liquidity channels. The analysis reveals that only local institutions and local individual investors who trade through the direct accounts are significantly associated with the liquidity of domestic firms. In contrast, the significant liquidity effect for foreign investors operates through the nominee accounts. While institutional ownership exhibits a linear negative relationship, our findings on local individuals and foreign nominees differ greatly from previous studies in that their relationship with stock liquidity is non-monotonic. Apart from the widely researched information asymmetry and trading effects, we find that liquidity is also driven by the largely ignored information competition channel. An important insight from our findings is that the large shareholdings by any particular investor group is detrimental to stock liquidity as they exacerbate information asymmetry, reduce the degree of competition and lower the level of trading activity.JEL Classifications: G12; G32

Stock Market Liberalisation and Cost of Equity: Firm-level Evidence from Malaysia

“…The key result in Ng et al (2015) consistently shows that foreign direct investors reduce liquidity in local equity markets, whereas foreign portfolio investors contribute significantly to liquidity improvement. For the Malaysian stock market, Lim et al (2015) find that the relationship between total foreign ownership and stock liquidity is non-monotonic, suggesting that the improvement in liquidity reverses when foreign shareholdings exceed the threshold level. Since foreign investors are expected to improve stock liquidity, the theoretical and empirical studies predict a reduction in cost of equity for liquid stocks.…”

“…Lim et al (2016), among others, find that foreign investors who trade through nominee accounts are elite processors of public market-wide and firm-specific news in the Malaysian stock market. In a companion study, Lim, Thian and Hooy (2015) find that the relationship between total foreign ownership and stock liquidity is non-monotonic, suggesting that the improvement in liquidity reverses when foreign shareholdings exceed the threshold level. Both studies report insignificant results for foreign institutions and foreign individual investors who trade through direct accounts, suggesting that foreign nominees are playing important informational and liquidity roles in the Malaysian stock market.…”

“…In another strand of literature, the liquidity benefits documented by Wei (2010) and Ng et al (2015) also come from foreign institutional investors. However, in the context of Malaysia, Lim et al (2015Lim et al ( , 2016 demonstrate the importance of incorporating foreign investor heterogeneity in which they disaggregate total foreign ownership into foreign institutions, foreign individuals, and foreign nominees. Both studies find that only the participation of foreign nominees improves the price efficiency and liquidity of Malaysian stocks.…”

“…Lim et al (2015Lim et al ( , 2016) also cover similar time period in their analysis of price efficiency and liquidity for Malaysia stocks. However, our sample size is smaller than the 600 firms in both studies.…”

“…The objective of this study is to complement the pioneering work of Lim et al (2015Lim et al ( , 2016 to provide more policy feedback on the participation of foreign investors in Bursa Malaysia. We explore the relationship between foreign ownership and cost of equity, as the latter is the focus area of those first generation stock market liberalisation papers (Bekaert & Harvey, 2000;Henry, 2000;Kim & Singal, 2000).…”