Ownership Structure and Bid-Ask Spread: Evidence from Malaysian Market

Abstract

Liquidity is a vital feature of any financial market. It reflects the attractiveness of a capital market and the confidence of investors. Malaysia is an emerging market, where family firms control 65% of firms, while government-linked corporation dominated 70% of market capitalization. This research aims to investigate the relationship between ownership structure, namely family ownership, conglomerate ownership, government ownership, foreign ownership, and dispersed ownership, towards market liquidity, measured as bid-ask spread. The study uses a total sample of 206 Malaysia manufacturing firms from 2011 to 2015. Despite the findings that show family, government, and dispersed ownership have an insignificant positive relationship with the bid-ask spread, and these imply the severity of information asymmetry despite its significant is lesser. However, conglomerate ownership and foreign ownership significantly and negatively affecting bid-ask spread, suggesting a lower agency cost and information asymmetry in this market. A lower conglomerate firm’s bid-ask spread indicates the creation of an internal capital market which reduce agency cost in this structure. The negative and significant relationship in foreign ownership suggesting foreigner investors emphasis the value of transparency and reduce the cost of the transaction in the market. The research provides theoretical implications about the determinants that affect the bid-ask spread and thus affect the market liquidity. The study provides the insights to the understanding of the influences of the ownership structure to the market liquidity.

Keywords: Ownership structurebid-ask spreadliquidity

Introduction

Liquidity is a vital feature of any financial market because it is the lubricating agent that facilitates the allocation of the capital of the financial markets. Liquidity is an essential part of a stock market as much as the efficiency is (Sharma, 2005). The lower level of the market liquidation level, the lesser the attraction of that stock for investments. A market with high liquidity suggests that the fast transaction of a high volume of securities at a lower cost. Therefore, asset prices would not significantly change from order time to purchase time (Nekounam, Zanjirdar, & Nasr, 2012).

Market liquidity is a well-known determinant of market volatility (Boermans, Frost, & Bisscho, 2016). Market liquidity can be measured by using various methods. One of the most popular way would be by measuring the bid-ask spread (Attig, Gadhoum, & Lang, 2003). Bid-ask spread is defined as the difference between the bid and ask quote divided by their arithmetic average (Kini & Mian, 1995). Therefore, liquidity can be defined as the ability of the market to absorb trades without causing a drastic change in the asset’s price and liquid markets refer to places where a transaction can take place with ease and at a low cost.

Various studies have been carried out to identify the dominant determinants factors that affect the market liquidity. The seminal work of Holmstrom and Tirole’s (1993) “Market Liquidity and Performance Monitoring” addressed that concentrated ownership would decrease the level of the trading activity, and so will reduce the stock liquidity. The concentration of ownership will affect investors to sell their stock. The illiquidity of the stock is usually vulnerable to manipulation and malpractices. The vulnerability often leads to abnormally high gains for some market players at the cost of the uninformed retail investors.

Rubin (2007) conducted a test to examine the relationship between the liquidity of a firm’s stock and its ownership structure. The study focused on insider and institutional ownership. The research found that the liquidity-ownership relationship is mostly driven by institutional ownership rather than insider ownership.

This paper focuses on the liquidity of the Malaysian stock market. From the policy-making perspective, improving the liquidity of Bursa Malaysia has always been a critical objective for the stock exchange regulators. A study by Lim et al. (2015) focused on the investor groups. However, the studies on the liquidity of the Malaysian stock market, are limited particularly on the relationship between ownership structure and bid-ask spread.

As a conclusion, the ownership structure seems to be one of the essential factors that affecting market liquidity. The study, therefore, looks into whether a different type of ownership structure illustrates the different degree of market liquidity.

Problem Statement

Despite the significant progress and numerous studies being for the better understanding of the market liquidity, the relationship between ownership structure and market liquidity (researcher will be using bid-ask spread as proxy for market liquidity) remain elusive. Kumar & Misra (2015) stated that liquidity has prominent implications for traders, regulators, stock exchanges and the listed firms. In recent years a huge amount of literature has emerged that deals with liquidity. An unresolved area in the field of finance is the relation between share ownership structure and liquidity (Rubin, 2007).

The bid-ask spread issue is never new nor outdated in the share market. Through the bid-ask spread, one can get the early impression about the stock liquidity. In this study, the researcher will categorize the ownership structure into four categories; family ownership, government ownership, dispersed ownership, and also foreign ownership. Two types of the ownership were mentioned in the research carried by Boujelbéne and Bouri (2008) as future research target that are family ownership and foreign ownership.

The information asymmetry has always been related to market illiquidity. To overcome the asymmetric information environment, the market maker has no choice but to widen the bid-ask spread. In the paper titled “Investor relations and information asymmetry” by Rodrigues and Galdi (2016), they used the the Brazilian companies with investor relations (IR) website as a proxy to measure the information asymmetry. The result shown that companies that have well informative IR websites able to decrease the bid-ask spread. Thus, the paper strongly encourages the company to provide more information to the stakeholder to reduce the information asymmetry.

Research Questions

There are three research questions in this study.

i. Are bid-ask spread affect market liquidity in this market?

ii. How does ownership structure affect bid-ask spread?

iii. What are the consequences of bid-ask spread on stock price?

Purpose of the Study

This paper focuses on the liquidity of the Malaysian stock market. From the policy-making perspective, improving the liquidity of Bursa Malaysia has always been a critical objective for the stock exchange regulators. A study by Lim, Thian, and Hooy (2015) focused on the investor groups. However, the studies on the liquidity of the Malaysian stock market, are limited particularly on the relationship between ownership structure and bid-ask spread. The purpose of this study is to study the relationship between ownership structure and bid-ask spread in Malaysian market. The specific objective would be including as follows:

Research Methods

To test the influences of ownership structure on market liquidity, the equation is presented as follow:-

$ABS=\mathrm{}{\beta }_{\mathrm{1}}+\mathrm{}{\beta }_{\mathrm{2}}\left(OS\right)+{\beta }_{\mathrm{3}}log\left(MC\right)+{\beta }_{\mathrm{4}}log\left(TV\right)+\mathrm{}{\beta }_{\mathrm{5}}\left(TA\right)+{\beta }_{\mathrm{6}}\left(\frac{D}{E}\right)$ Equation 1 Where ABS means average bid-ask spread, it is measured as $ABS=\frac{(Ask-Bid)}{\left[\frac{\left(Ask+Bid\right)}{\mathrm{2}}\right]}$. OS stands for ownership structures- family ownership, government ownership, foreign ownership, dispersed ownership, and conglomerate ownership. Log(mc) is the natural logarithm for market capitalization, for the log(tv) would means natural logarithm for turnover by volume of the shares, TA is defined as the total assets of the firm, and lastly D/E is the total debt over equity ratio.

The study focuses on the manufacturing sector which contributes 22.7% to the Malaysia economy. The study randomly identified the firms in the sector, and found the sample of about 206 firms with ownership categorization for the study. The sample of the study covers the data from 2011- 2015. The financial data were collected from Datastream. The breakdown of the sample firms is shown in Table 1 .

Findings

Table 2 shows the different type of ownership structure and their relationship with market liquidity. There is no apparent relationship to prove that ownership structure could significantly affect market liquidity in this market. Family ownership is found to have an insignificant relationship to the bid-ask spread. The findings indicate that family ownership although cause the market to become illiquid, but it is not significant to affect the transaction in Malaysia stock market. Given the context of the Malaysia market, where 60% are family controlled, the illiquidity of the market is not negatively related. This may due to the efficiency of regulations of trade in Malaysia equity market.

The similar finding is found in Ali et al. (2007). The reason given by Ali et al. is family firms have a more number of analysts following. Hence, the analysts will be able to provide the market with the relevant information and reduce the problem of transactions. The number of analysts’ analyzation lower the dispersion of the forecast and minimize the forecast error, and improve market liquidity. As the results, the bid-ask spread is smaller. Besides, the research also found that family firms with the founder CEO, are primarily responsible for family firms to exhibit a better disclosure practice.

The issues of conglomerate firms which will improve market liquidity is not aligned with Marques (2016), but against the suggestion, that conglomerate firms are associated with illiquidity problem. However, the transaction in conglomerate firms may due to higher cross-holdings transaction, which in fact is tunneling activities. There is a possibility of the low degree of transparency, and low bid-ask spread, in fact, benefits cross-holdings affiliations.

Similar to family-owned, the t-test results declared that the ownership structure for government-owned firms is not individually crucial in explaining the bid-ask spread. GLCs in Malaysia are also always in the spotlight of the analyst. The result obtained was supported by the study by Choi et al. (2010). Choi’s research found out that initially there is a significant relationship between bid-ask spread and government ownership firm. However, in the later period, the relationship became insignificant. This was due to the more active control transfer and the emergence of private controlling shareholders, regulatory changes in ownership structure. Most important is the corporate governance ownership being improved, thus, causing the relationship between the ownership structure turns out to be insignificant.

In the context of foreign-owned firms, foreign-owned firms are found to improve market liquidity, as shown in the negative and significant bid-ask spread. The finding is supported by Choi et al. (2013), Rhee and Wang (2009), and Levine and Schmuckler (2006). They agreed that the major shareholder in a firm would cause a negative impact on the bid-ask spread. This is because foreign ownership usually will increase the adverse selection and thus resulting in a narrow spread.

The t-test results showed that the ownership structure for dispersed-owned firms is individually insignificant in explaining the bid-ask spread. The finding is contradicting the researches done by Jacoby and Zheng (2010) and Bolton and Thadden (1998) which stated that with owner dispersion, the market would be more liquid. However, the researcher’s finding was back-up Omet (2007) finding. Omet (2007) stated that the risk itself is the primary determinant factor of spread, and with higher ownership dispersion, it does not improve market liquidity.

Conclusion

Table 3 indicates the relationship between bid-ask spread and the ownership structure of selected Malaysian firms. Different type of ownership structure – conglomerate firms and family firms showed higher liquidity as compared to family, government and dispersed structure. The findings on foreign-owned firms are expected, as generally foreign firms attract attention from the investors and are more transparent as compared to other ownership structure. The liquidity in conglomerate firms, however, may suggest the different perspective on the equity market, as the transaction may due to inter-affiliation trading which attempts to boost up the share price.

For the family ownership, government ownership, and dispersed ownership, the positive relationship although insignificant indicates that the issues of agency conflicts prevail. However, the insignificant result indicates that the current rules and regulation in the market are sufficient to ensure Malaysia equity market is liquid enough to attract investments from investors

References

1. Ali, A., Chen, T.-Y., & Radhakrishnan, S. (2007). Corporate disclosures by family firms. Journal of Accounting and Economics, 44(1-2), 238-286.
2. Attig, N., Gadhoum, Y., & Lang, L. H. (2003). Bid-ask spread, asymmetric information and ultimate ownership. SSRN Working Paper. DOI:
3. Boermans, M. A., Frost, J., & Bisscho, S. S. (2016). European bond markets: Do illiquidity and concentration aggravate price shocks? Economics Letters, 141(C), 143-146.
4. Bolton, P., & Thadden, E. L. V. (1998). Blocks, liquidity, and corporate control. The Journal of Finance, 53(1), 1-25.
5. Boubakri, N., Chen, R., Ghoul, S. E., & Guedhami, O. (2017). State ownership, liquidity and valuation: Evidence from privatization. DOI:
6. Boujelbéne, N. B., & Bouri, A. (2008). Ownership structure and bid-ask spread: Evidence from Tunisian companies. Corporate Ownership and Control, 5(3), 445-451.
7. Choi, J. J., Lam, K. C., Sami, H., & Zhou, H. (2013). Foreign ownership and information asymmetry. Asia-Pacific Journal of Financial Studies, 42(1), 141-166.
8. Choi, J. J., Sami, H., & Zhou, H. (2010). The impacts of state ownership on information asymmetry: Evidence from an emerging market. China Journal of Accounting Research, 15, 20-33
9. Chu, E., & Cheah, K. (2006). Does ownership structure matter? Evidence from Malaysian Equity Market. Corporate Ownership & Control, 4(1), 77-90.
10. Gursoy, G., & Aydogan, K. (2002). Equity ownership structure, risk taking and performance: An empirical investigation in Turkish companies. Emerging Market Finance and Trade. 38(6), 6-25
11. Hanousek, J., & Podpiera, R. (2002). Informed trading and the bid-ask spread: Evidence from an Emerging Market. 31(2), 275-296
12. Heflin, F., & Shaw, K. W. (2000). Blockholder ownership and market liquidity. The Journal of Financial and Quantitative Analysis, 35(4), 621-633.
13. Holmstrom, B., & Tirole, J. (1993). Market Liquidity and Performance Monitoring. Journal of Political Economy, 101(4), 678-709.
14. Jacoby, G., & Zheng, S. X. (2010). Ownership dispersion and market liquidity. International Review of Financial Analysis, 19(2), 81-88.
15. Kumar, G., & Misra, A. K. (2015). Closer view at the stock market liquidity: A literature review. Asian Journal of Finance & Accounting, 7(2), 25-35
16. Kini, O., & Mian, S. (1995). Bid-ask spread and ownership structure. The Journal of Financial Research, 42(4), 401-414.
17. Levine, R., & Schmuckler, S. L. (2006). Internationalization and stock market liquidity. Review of Finance, 10 (March), 153-187.
18. Lim, K. P., Thian, T. C., & Hooy, C. W. (2015, July 25). Corporate shareholdings and the liquidity of The Malaysian stocks: Investor heterogeneity, Trading account types and the underlying Channels. Retrieved from https://mpra.ub.uni-muenchen.de/67602/
19. Marques, L. B. (2016). Stock market liquidity in Chile. IMF Working Paper No16/223.
20. Marwati, L. (2008). Market microstructure: Rationality and efficient market hypotheses. International Journal of Business and Management. April. 53-61
21. Mihai, I. O. (2014). A literature review of foreign ownership and company. Annals of “Dunarea de Jos” University of Galati. 2, 75-82
22. Nekounam, J., Zanjirdar, M., & Nasr, M. D. (2012). Study of relationship between ownership structure liquidity of stocks of companies accepted in Tehran Sstock Exchange. Indian Journal of Science and Technology, 48(1), 2840-2845.
23. Omet, G. (2007). Ownership structure and stock liquidity: Some evidence from the Jordanian capital market. Corporate Ownership & Control, 4(2), 75-82
24. Rhee, S. G., & Jianxing, W. (2009). Foreign institutional ownership and stock market liquidity: Evidence from Indonesia. Journal of Banking & Finance, 33(7), 1312-1324.
25. Rubin, A. (2007). Ownership level, ownership concentration and liquidity. Journal of Financial Markets, 10, 219-248.
26. Sarin, A., Shastri, K. A., & Shastri, K. (1998). Ownership Structure and Stock Market Liquidity. https://ssrn.com/abstract=2652
27. Sharma, L. (2005). Ownership structure and stock liquidity: Evidence from Indian market. Document de travail, TA Pai Management Institut, Manipal.
28. Strik, M. (2011). The implications for dispersed ownership structure vs. large shareholders on company performance in the US. Thesis. University of Tilburg. http://arno.uvt.nl/show.cgi?fid=129447