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Foreign Ownership, Legal System and Stock Market Liquidity

Author

Listed:
  • Jieun Lee

    (Financial & Monetary Economics Team, Economic Research Institute, the Bank of Korea)

  • Kee H. Chung

    (Department of Finance and Managerial Economics, School of Management, SUNY at Buffalo)

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 21 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 benefits to the market in terms of lower trading costs by increasing competition in the price discovery process. Both the price impact of trades and the bid-ask spread are smaller for companies in the common law countries, and the general increase in foreign ownership in emerging markets after the global financial crisis resulted in higher price impacts and lower spreads.

Suggested Citation

  • Jieun Lee & Kee H. Chung, 2015. "Foreign Ownership, Legal System and Stock Market Liquidity," Working Papers 2015-15, Economic Research Institute, Bank of Korea.
    • Handle: RePEc:bok:wpaper:1515
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    References listed on IDEAS

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    Cited by:

    1. Young Sik Kim & Ohik Kwon, 2019. "Central Bank Digital Currency and Financial Stability," Working Papers 2019-6, Economic Research Institute, Bank of Korea.
    2. Sung Ho Park, 2018. "Fixed-Rate Loans and the Effectiveness of Monetary Policy," Working Papers 2018-20, Economic Research Institute, Bank of Korea.
    3. Ohik Kwon & Jaevin Park, 2018. "E-money: Legal Restrictions Theory and Monetary Policy," Working Papers 2018-17, Economic Research Institute, Bank of Korea.
    4. Youngjin Yun, 2018. "Cross-Border Bank Flows through Foreign Branches: Evidence from Korea," Working Papers 2018-23, Economic Research Institute, Bank of Korea.
    5. Jinsoo Lee & Bok-Keun Yu, 2018. "What Drives the Stock Market Comovements between Korea and China, Japan and the US?," Working Papers 2018-2, Economic Research Institute, Bank of Korea.
    6. Muhammad Sadil Ali & Shujahat Haider Hashmi, 2018. "Impact of Institutional Ownership on Stock Liquidity: Evidence from Karachi Stock Exchange, Pakistan," Global Business Review, International Management Institute, vol. 19(4), pages 939-951, August.

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    More about this item

    Keywords

    Foreign investors; Information asymmetry; Price impact; Spread; Adverse selection component; Non-information cost of trading; Illiquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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