Does the investment horizon of institutional investors matter for stock liquidity?

Xiaoqiong Wang and Siqi Wei

International Review of Financial Analysis, 2021, vol. 74, issue C

Abstract: This paper examines the role of the investment horizon of institutional investors on stock liquidity of firms. We show that an increase in long-term institutional ownership is negatively associated with firm liquidity, while an increase in short-term ownership is positively related to a firm's stock liquidity. We identify the ownership-liquidity relationship by examining two major channels: the trading activity channel and the informational friction channel. Long-term investors reduce stock liquidity through low frequency trading and access to value-enhancing and private information, which induces adverse selection bias. In contrast, short-term investors improve liquidity through trading activity and competition with other investors, which lowers transaction costs. Our findings further suggest that the effects of an increase in long-term (short-term) institutional investors on liquidity weaken (strengthen) when a firm has more publicly available information. Finally, we show that the positive impact of an increase in long-term ownership on valuation is more pronounced for firms with higher liquidity and the valuation effect is persistent.

Keywords: Institutional investors; Investment horizon; Stock liquidity; Trading activity; Information (search for similar items in EconPapers)
JEL-codes: G20 G23 G30 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:74:y:2021:i:c:s1057521920302891

DOI: 10.1016/j.irfa.2020.101648

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