Influence of Institutional Investor Heterogeneity on Stock Liquidity and Its Underlying Liquidity Channels: Evidence from Bursa Malaysia

Hing, Jia Jia (2019) Influence of Institutional Investor Heterogeneity on Stock Liquidity and Its Underlying Liquidity Channels: Evidence from Bursa Malaysia. Masters thesis, Tunku Abdul Rahman University College.

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Abstract

Stock liquidity, which can be defined as the ability to trade a substantial quantity of a company’s stock within a short period of time without any major price discrepancies, is an important component in the stock market to ensure its growth and development. This paper examines the influence of institutional investor heterogeneity and its underlying liquidity channels through which these institutional investor groups affect stock liquidity for the top 100 listed firms in Bursa Malaysia over the period of 2012 to 2018. In particular, this paper extends the stock liquidity literature by addressing the issue of institutional investor heterogeneity (i.e., active institutional investors and passive institutional investors) and the interactions of competing liquidity channels (i.e., information asymmetry channel and trading activity channel). Using the pooled ordinary least squares estimation procedure, the analyses reveal that active and passive institutional investors play different liquidity roles in Bursa Malaysia. Initially, the empirical results based on the linear model show that the relationship between institutional investor shareholdings and stock liquidity is solely attributed to the active institutional investors. Further tests using the quadratic model reveal that a non-monotonic relationship arises between both active and passive institutional investors and stock liquidity due to the competing liquidity channels. The results show that passive institutional investors improve stock liquidity because they lower the level of information asymmetry. On the other hand, active institutional investors improve stock liquidity because they improve the level of trading activity. Moreover, this study reports a U-shaped relationship between passive institutional investors and the Amihud illiquidity ratio, which implies the dominance of positive trading effect at lower levels of passive institutional investor shareholdings. However, once their shareholdings exceed the threshold point, the negative effects brought about by information asymmetry become the dominant force. By contrast, the findings show an inverted Ushaped association between active institutional investors and stock illiquidity ratio. This indicates the dominance of the negative effects brought about by information asymmetry at lower levels of active institutional investor shareholdings. However, once their shareholdings exceed the threshold point, the positive trading effect becomes the dominant force. The empirical findings have several implications such as policymakers should formulate the appropriate measures by focusing on the important investor groups and the underlying liquidity channels through which these investors affect stock liquidity. Moreover, public listed firms should build and maintain a strong and healthy relationship with the institutional investors as well as adopt the best corporate governance practices to mitigate information asymmetry problem and devising appropriate strategies to stimulate active trading.