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Liquidity, stock returns and ownership structure: an empirical study of the BSE

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  • Venkat Eleswarapu
  • Chandrasekar Krishnamurti

Abstract

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.

Suggested Citation

  • Venkat Eleswarapu & Chandrasekar Krishnamurti, 1995. "Liquidity, stock returns and ownership structure: an empirical study of the BSE," Finance 9507005, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9507005
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    References listed on IDEAS

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    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Benston, George J. & Hagerman, Robert L., 1974. "Determinants of bid-asked spreads in the over-the-counter market," Journal of Financial Economics, Elsevier, vol. 1(4), pages 353-364, December.
    3. Lippman, Steven A & McCall, John J, 1986. "An Operational Measure of Liquidity," American Economic Review, American Economic Association, vol. 76(1), pages 43-55, March.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Eleswarapu, Venkat R. & Reinganum, Marc R., 1993. "The seasonal behavior of the liquidity premium in asset pricing," Journal of Financial Economics, Elsevier, vol. 34(3), pages 373-386, December.
    6. Harold Demsetz, 1968. "The Cost of Transacting," The Quarterly Journal of Economics, Oxford University Press, vol. 82(1), pages 33-53.
    7. Bhide, Amar, 1993. "The hidden costs of stock market liquidity," Journal of Financial Economics, Elsevier, vol. 34(1), pages 31-51, August.
    8. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
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    Cited by:

    1. Quigley, Neil, 2003. "The Economics of Harmonisation: Implications for Reform of Commercial Law and Regulation in New Zealand," Working Paper Series 3885, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    2. Venkat Eleswarapu & Chandrasekar Krishnamurti, 1995. "Do `speculative traders' increase Stock Price Volatility? Empirical evidence from the Bombay Stock Exchange," Finance 9507006, EconWPA.
    3. Ajay Shah, 1995. "The impact of speculation upon volatility and market efficiency: The badla experience on the BSE," Finance 9507002, EconWPA.
    4. Laura Beny, 2006. "Do Investors Value Insider Trading Laws? International Evidence," William Davidson Institute Working Papers Series wp837, William Davidson Institute at the University of Michigan.

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    JEL classification:

    • G - Financial Economics

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