Liquidity, stock returns and ownership structure: an empirical study of the BSE
We study the problem of illiquidity that afflicts the stocks listed on the Bombay Stock Exchange (B.S.E.). Trading on a regular basis is concentrated in only a few of the listed stocks. We examine this issue by empirically looking at the characteristics of firms leading to differential levels of trading frequency and also, the resultant effect on average returns. Based on the study of a random sample of 250 firms over the five year period - 1989 to 1993, we find evidence in favor of a liquidity premium for stocks on the B.S.E. Also, we find trading frequency is positively related to number of shareholders and shares outstanding. In addition, the ownership structure seems to matter, with concentration in the hands of insiders and government bodies having a deleterious effect on liquidity.
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