Nexus between Ownership Structure and Stock Liquidity Evidence from Indian Service Sector

Abstract

This study attempts to find relationship between the firm ownership structure and stock liquidity. Data for this study is taken from the listed stocks of National stocks exchange which are the constituents of CNX500 index, and it includes 74 financial sector, 26 Information technologies and 7 telecommunication sector companies. The sample data for the study is taken from 2009 to 2015 and stock liquidity is measured by using Amihud illiquidity ratio (2002) and turnover ratio. Concentration of ownership in few hands means less liquidity.  It is found that public is the largest shareholder in case of Information technology firms with equal representation from institutions and non institutional holdings and has enhanced liquidity as measured by amihud illiquidity ratio compared to financial service and telecommunication sector. Independent variables like percentage of shares held by mutual fund institutions, financial Institutions, Insurance companies, FII, Individuals holding less than 1 lakh, and Individuals holdings more than 1 lakh have significant positive influence on stock liquidity. The study found that public concentration of firm ownership lead to better liquidity as it enhances the frequency of trade. Higher promoter shareholdings affect the liquidity adversely. Public shareholdings and turnover ratio are highly correlated; indicating better liquidity for shareholders and financial service stocks have superior liquidity compared to Information technology and telecommunication stocks.

Keywords: Ownership structure, stock liquidity, Amihud Illiquidity ratio Promoter holdings

JEL category: G23, G21