Agarwal, Prasun. 2009. Institutional Ownership, Liquidity and Liquidity Risk. Doctoral
Dissertation, Cornell University.
In this dissertation, I
focus on examining the effects of institutional ownership on stocks' liquidity
and liquidity risk using a sample of firms listed on the NYSE and the AMEX over
the period 1980-2005. The first chapter provides a brief introduction to
liquidity and emphasizes the role of institutional ownership in financial
markets. In the second chapter, I examine the relationship between
institutional ownership and liquidity of stocks, focusing on the effect of
institutions' relative information advantage. The information advantage of
institutions can affect liquidity through two channels: decreasing liquidity
resulting from increasing information asymmetry (adverse selection effect) and
increasing liquidity resulting from increasing price discovery due to
competition among institutions' information efficiency effect.
My evidence indicates a
non-monotonic (U-shaped) relationship between the level of institutional
ownership and stock liquidity. The two effects vary with the amount of publicly
available information and asset risk. I also find that institutional ownership
(Granger) causes liquidity, allaying concerns that the findings result from
institutions' preference for liquid stocks. Lastly, I document that liquidity
decreases with increasing diversification of the portfolio of institutional
investors and the fraction of equity held by long-term investors.
In the third chapter, I
examine the effects of institutional ownership on stocks' time variation in liquidity.
It helps advance an understanding of the sources of commonality in liquidity
and the determinants of the sensitivity of an asset's liquidity to changes in
market-wide liquidity (systematic liquidity risk) and the total variance of
liquidity of a firm over time. I interpret my findings in the context of
correlated trading by institutions resulting either from their tendency to herd
or to trade on common information and signals. I find that systematic liquidity
risk increases with the level of institutional ownership, homogeneity and
investment-horizon of the institutional investor base, while it decreases with
ownership concentration and increase in blockholdings. However, the variance of
liquidity decreases with the level of institutional ownership, homogeneity of
the investor base and ownership concentration. Overall, the findings indicate
that the ownership structure of stocks affects both the systematic liquidity
risk and the variation in their liquidity over time.
No comments:
Post a Comment