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Influence of institutional investor heterogeneity on stock liquidity and its underlying liquidity channels

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  • Jia Jia Hing
  • Yee Peng Chow

Abstract

This paper investigates the influence of institutional investor heterogeneity (i.e., active and passive institutional investors) and the underlying liquidity channels (i.e., information asymmetry and trading activity channels) through which these institutional investor groups affect stock liquidity. Drawing on a sample of listed firms in Malaysia from 2012 to 2018, this paper employs the pooled ordinary least squares method to conduct the empirical tests. Initially, the empirical results based on the linear model show that the association 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 shareholdings by both active and passive institutional investors and stock liquidity due to competing liquidity channels. In particular, passive institutional investors improve stock liquidity due to lower level of information asymmetry, while active institutional investors improve stock liquidity by enhancing the level of trading activity.

Suggested Citation

  • Jia Jia Hing & Yee Peng Chow, 2022. "Influence of institutional investor heterogeneity on stock liquidity and its underlying liquidity channels," International Journal of Business and Emerging Markets, Inderscience Enterprises Ltd, vol. 14(3), pages 252-278.
    • Handle: RePEc:ids:ijbema:v:14:y:2022:i:3:p:252-278
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