Foreign Ownership, Legal System and Stock Market Liquidity

Jieun Lee () and Kee H. Chung ()
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Jieun Lee: Financial & Monetary Economics Team, Economic Research Institute, the Bank of Korea
Kee H. Chung: Department of Finance and Managerial Economics, School of Management, SUNY at Buffalo

No 2015-15, Working Papers from Economic Research Institute, Bank of Korea

Abstract: In this study we analyze how the price impact of trades and the bid-ask spread are related to foreign stock ownership using data from 21 emerging markets. We show that while the price impact of trades increases with the percentage of shares held by foreign investors, the bid-ask spread decreases with foreign ownership. We interpret these results as evidence that, although foreign investors increase adverse selection risks for liquidity providers, they bring net benefits to the market in terms of lower trading costs by increasing competition in the price discovery process. Both the price impact of trades and the bid-ask spread are smaller for companies in the common law countries, and the general increase in foreign ownership in emerging markets after the global financial crisis resulted in higher price impacts and lower spreads.

Keywords: Foreign investors; Information asymmetry; Price impact; Spread; Adverse selection component; Non-information cost of trading; Illiquidity (search for similar items in EconPapers)
JEL-codes: G10 G32 G34 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2015-06-05
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Citations: View citations in EconPapers (6)

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http://papers.bok.or.kr/RePEc_attach/wpaper/english/wp-2015-15.pdf Working Paper, 2015 (application/pdf)

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