Causal Nexus between Firm Ownership Structure and Market Liquidity

Abstract

A firm's ownership consists of shares held by promoters, public, institutions and other bodies. Ownership concentration in fewer hands leads to amplified agency cost and information asymmetry and impinge on the firm's performance and market liquidity. Given the large number of liquidity measures and methodologies employed both by practitioners and academic researchers, this paper examines the market liquidity using impact cost, turnover ratio and coefficient of elasticity of trading. Looking at the logic behind their construction, and how they relate to each other and its relation with constituents of firm's ownership structure, this study also attempts to find the relationship between the ownership structure and liquidity indicators. NSE Banking index stocks were taken as the sample for the period from July 2013 to June 2014. It is observed that the market liquidity as measured by impact cost and turnover ratio is not influenced by promoter group holding, institutions shareholders and non institutions shareholders and it confirms the findings of Paul Brockman, Dennis Y. Chung, and Xuemin (Sterling) Yan (2009). However, promoter group holding and institutions shareholding are significant explanation variables for market liquidity as measured by coefficient of trading model. The granger causality test confirms that public shareholding granger cause coefficient of elasticity of trading. It also shows that there is no causal relationship between promoter group holding, public shareholding, institutions shareholding, non institutions shareholding, and impact cost and turnover ratios.