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Foreign institutional ownership and liquidity commonality around the world

Author

Listed:
  • Deng, Baijun
  • Li, Zhongfei
  • Li, Yong

Abstract

In this study, we identify the relation between foreign institutional ownership and stock liquidity commonality in 39 countries from 2000 to 2014. Our results show a negative and robust linkage between foreign institutional ownership and global stock liquidity commonality. Corporate transparency is a key mechanism through which foreign institutional investors can reduce stock liquidity commonality. Independent and U.S.-based foreign institutional investors have a greater effect on reducing stock liquidity commonality. Additionally, there is a U-shaped relation between foreign institutional ownership and stock liquidity commonality. Next, we provide evidence that foreign institutional investors mitigate the effects of local culture, exaggerate the impacts of economic policy uncertainty, and substitute the role of a country's corporate governance level. Finally, it is evident that stock liquidity commonality mediates the relation between foreign institutional ownership and firm valuation. Foreign institutional investors can enhance firm valuation through stock liquidity commonality and stock illiquidity.

Suggested Citation

  • Deng, Baijun & Li, Zhongfei & Li, Yong, 2018. "Foreign institutional ownership and liquidity commonality around the world," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 20-49.
    • Handle: RePEc:eee:corfin:v:51:y:2018:i:c:p:20-49
    DOI: 10.1016/j.jcorpfin.2018.04.005
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    More about this item

    Keywords

    Foreign institutional ownership; Liquidity commonality; International finance;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • N2 - Economic History - - Financial Markets and Institutions

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