Article

Impact of Institutional Ownership on Global Business Review

19(4) 1–13
Stock Liquidity: Evidence from Karachi © 2018 IMI
SAGE Publications
Stock Exchange, Pakistan sagepub.in/home.nav
DOI: 10.1177/0972150918772927
http://journals.sagepub.com/home/gbr

Muhammad Sadil Ali1

Shujahat Haider Hashmi2

Abstract
This study empirically investigates the impact of institutional ownership on stock liquidity; we used a
sample size of 84 non-financial companies listed on Karachi Stock Exchange (KSE). Data were gathered
for the period of 10 years, starting from 2005 to 2014. This study employs turnover ratio to measure
stock liquidity while institutional ownership is measured by dividing number of shares kept by institutions
from total number of outstanding shares. The fixed effect model shows that the degree of stock liquidity
in Pakistani-listed firms tend to significantly increase for the firms where institutions hold a significant
amount of share of that particular firm. This study also finds that ownership by bank and investment
companies are positively associated with liquidity, while relationship between ownership by insurance
companies and stock liquidity is found to be insignificant. Our evidence supports that many but not
all institutional investors play a positive role to improve stock liquidity in Pakistani capital market.
The results of this study are important for dealers, traders and brokers, in the sense that they can
facilitate investors in efficient resource allocation.

Keywords
Institutional ownership, stock liquidity, trading hypothesis

Introduction
Institutional investors are considered as a common feature of modern capital market. They play an
important role to bring stock liquidity in financial markets. Although institutional ownership has been
considered as a stabilizing factor in emerging markets, questions have been raised about the impact of
institutional ownership on stock liquidity. Much has been written in the field of finance that examines the
effect of ownership structure on stock liquidity (refer e.g. Agarwal, 2009; Lee, 2011; Liu, 2013; Rubin,
2007). Many early studies have focused on developed markets; research on liquidity in emerging markets

1
Research Assistant, PhD Scholar, Allama Iqbal Open University, Islamabad, Pakistan.
2
PhD Scholar, School of Economics, Huazhong University of Science and Technology (HUST), Wuhan, Hubei, China.

Corresponding author:
Muhammad Sadil Ali, Department of Business Administration, Allama Iqbal Open University, H-8, Islamabad, Pakistan.
E-mail: sadil.ali@aiou.edu.pk
2 Global Business Review 19(4)

is attracting increased attention. The growing body of research in emerging market is important for
many reasons.
First, developed markets are more advanced and progressive markets, which differ from developing
markets. Emerging markets have higher information asymmetry, different market dynamics, different
ownership structure, limited access to debt financing and nature of businesses (Ma, Anderson & Marshall,
2016). Second, while doing research on the institutional investors and stock liquidity relationship, most
studies have considered institutions as both identical and total ownership. However, in fact all institutions
are not completely similar and usually differ according to their features. Institutional investors differ
with respect to their types and functions and even have different investment time frames (Bushee, 1998).
We investigated this premise by observing the effects of institutional ownership on stock liquidity.
For this study, we used non-financial firms of Pakistan as our empirical setting because of two important
reasons. First, capital market of Pakistan is leading among the emerging markets in terms of institutional
ownership. Most of the shareholders are intuitional investors in the sense that a large number of shares
are owned by institutions from a total number of outstanding shares. Second, the capital market of
Pakistan has achieved major development status in term of regulatory changes, market performance and
improved management. These developments in financial market and firm performance make this topic
under investigation; particularly it is interesting to investigate the impact of different types of institu-
tional ownership on liquidity. Institutional investors play a major role in the development of Pakistani
capital market.
Moreover, recently the shares owned by the institutional investors have increased considerably in
Pakistan (Shaikh, Iqbal & Shah, 2012). It is frequently argued in the literature that institutional owner-
ship plays a significant role in financial market to stabilize liquidity; there exists a relationship between
the institutional ownership and stock liquidity (Attig, Fong, Gadhoum & Lang, 2006). Though liquidity
is important for making investment decision, yet it is not clear whether institutional investor could affect
liquidity or not in emerging markets. However, institutions might play a pivotal role in managing finan-
cial risk (Agarwal, 2009). Generally, investors expect positive return (premium) from their chosen stocks
and want certain level of stock liquidity so they can buy or sell their securities without any significant
loss. Many institutional investors evaluate their investments on the basis of liquidity and liquidity risk;
the value of a security means nothing if they cannot find a buyer for that security in the market (Pastor
& Stambaugh, 2003). Therefore, stockholders like to look at liquidity as an instrument to measure
expected return of stock, how easy it would be to sell the asset or security in stock market. Recent studies
predict institutional ownership could affect liquidity of stock (Lee, 2011).
Economic theory suggests that institutional ownership and stock liquidity have a positive relation-
ship. While studying relationship between institutional ownership and liquidity, researchers mainly
focus on two important hypotheses, for example, trading hypothesis and adverse selection hypothesis.
The trading hypothesis suggests that when investors trade frequently or shuffle their portfolios more
often, it reduces transaction costs, which ultimately increase stock liquidity (Merton, 1987; Schwartz,
1988). On the other hand, adverse selection hypothesis posits that when buyers and sellers have access
to different information, investors with better information of stock (e.g. informed shareholders, insiders
and institutional investors) will gain more advantage compared to outsiders, which increases asymmetry
and reduces liquidity (Kyle, 1985; O’Hara, 2003). It has been also reported that higher stock liquidity
leads to improved sharing of financial risks by affecting stakeholder’s risk management and other trading
decisions (Sadka, 2010).
This study has thoroughly examined the relationship between institutional ownership and stock
liquidity. We further shed light on the behaviour of investor type and stock liquidity by analysing the
Ali and Hashimi 3

relationship between these two variables. We suggest implications using finance theories that link own-
ership characteristics to liquidity and find how institutional investors influence liquidity of stocks and
whether these results vary with institution types.
This study makes significant contributions to the literature connecting liquidity and institutional
ownership. Agarwal (2009) finds that institutional ownership positively affects stock liquidity. Liu
(2013) shows that increase in the number of institutional investors lead to increase in stock liquidity.
Whereas Cao and Petrasek (2014) find that institutional ownership reduces liquidity risk of stock. We
contribute to this literature by investigating the relationship between stock liquidity and ownership by
different types of institutional investors, such as banks, investment companies and insurance companies.
Our main innovations to the literature is that we considered institutional ownership as a heterogeneous
group while other studies have deliberated institutional ownership as homogeneous (collective) group,
without decomposing it to the different types of institutions. Results of this study are important for
dealers, traders and brokers, in the sense that they can facilitate investors in efficient resource allocation
and investment decision-making.
The remainder of this article is organised as: Second section presents an overview of previous litera-
ture related to the study. The third section describes the methodology used for this study, which means
how the research is being conducted and briefly introduces other control variables. And the fourth section
describes results and findings obtained via Eviews and MS-Excel. Finally, this study gives conclusion
and recommendations.

Literature Review
Current literature is enriched with theoretical studies and empirical explanations on liquidity and institu-
tional ownership. Finance literature documents liquidity as the ability to quickly sell securities without
any significant loss and with no price impact; whereas institutional ownership is the proportion of
outstanding shares owned by different type of institutions such as banks, mutual funds, hedge funds,
investment and insurance companies vice versa (Bushee, 1998). Various studies have been conducted to
investigate the impact of institutional ownership on stock liquidity starting with a paper of Rubin (2007);
this study explains the relationship between ownership structure and stock liquidity of NYSE-listed
firms. Results of this study show that ownership by institution is more significantly associated with
liquidity than individual ownership.
Similarly, Agarwal (2009) argued that institutional ownership affects both the variation in stock
liquidity and market liquidity. He also reported that liquidity is significantly influenced by institutional
investors because they have more information and may influence stock liquidity in two ways: they lower
liquidity due to low information symmetry, which is called adverse selection hypothesis, and the other is
improving stock liquidity resulting from the rivalry of price stability process among different institu-
tions, which is known as information efficiency effect. It has been also argued that institutional owner-
ship statistically and significantly affects stock liquidity (Blume & Keim, 2012). Institutional investors
are considered as more informed traders due to their high investment, and being a part of an institution,
they get more private information (Fehle, 2004).
There are different perspectives about the effects of institutional ownership on stock liquidity. Cao
and Petrasek (2011) argued that institutional investors increase stock liquidity by affecting the sensitivity
of stock’s return to change liquidity in financial market. Similarly stocks with larger increase in the
number of institutional investors tend to be less illiquid than other stocks. Institutional ownership leads
to increased stock liquidity because active and more informed investors exert higher impact on liquidity
4 Global Business Review 19(4)

than any other investors (Liu, 2013). Moreover, findings of Yaghoobnezhad, Roodposhti and Zabihi
(2011) reveal that institutional ownership can affect stock liquidity in two ways because of their various
advantages: First, increase in liquidity risk due to the higher information asymmetry which is called
adverse selection effect or hypothesis. Second, decrease of liquidity risk due to the increase of price
recovery caused from the competition among institutional investors. They also argue that the percentage
of institutional ownership is positively associated with stock liquidity, while ownership concentration is
inversely associated with liquidity of stocks.
Others argue that institutional ownership affects stock liquidity in the opposite direction. For instance,
Rhee and Wang (2009) have investigated the relationship between liquidity and institutional ownership
by particularly examining the effects of institutional investors on the stock liquidity in Japan. Findings
reveal that ownership by institutions has an inverse impact on stock liquidity and positive impact on
liquidity risk. However, recent studies document that insider investors, financial institution and financial
experts have more information than individual investors. Individual investors have less access to infor-
mation as compared to institutions; shares held by institutions have greater liquidity than those held by
individuals (Zhou, 2011).
Furthermore, other types of institutional investors such as investment companies, hedge funds, mutual
funds and bank ownership could also affect stock liquidity. Typically, bank ownership has the unique
ability to trade against liquidity risk because they have experience of cost and other funding that covers
negative market-wide liquidity. Therefore, bank ownership could increase stock liquidity (Gatev &
Strahan, 2006). Syamala, Chauhan and Wadhwa (2014) studied the impact of institutional ownership on
stock liquidity and showed that the inverse relationship between these variables is typically driven by
commercial banks and foreign ownership. Whereas the relationship between retail ownership and
sock liquidity is found to be positive and institutional investors tend to hold higher liquid securities as
compared to other investors; institutional investors substitute for informed investors and prefer to invest
in liquid stocks to avoid illiquidity cost. Moreover, Syamla et al. (2014) also evidenced that institutional
investors like to hold liquid stocks because they act as informed traders.
Similarly, Cao and Petrasek (2014) found a negative relationship between bank ownership and liquidity
risk of stock; stocks held by banks are more exposed to market liquidity than similar stock held by other
institutional investors or individuals. Sias (2004) argues that mutual funds and hedge funds could
decrease stock liquidity. Mutual funds herd trading behaviour of investor while hedge funds use high
level of leverage. Ajina, Lakhal and Sougne (2015) show that ownership by insurance company increases
stock liquidity because they use hedging techniques to overcome financial risk and trade against negative
market liquidity. In contrast ownership by investment companies is positively associated with liquidity
risk (Cao & Petrasek, 2014). This implies that investment companies positively affect stock liquidity in
the cross section.
Several factors can affect liquidity of stocks. Glosten and Milgrom (1985) argued that one source of
liquidity is the presence of insider ownership. They are more informed traders than others, which sug-
gests that the level of insider ownership in a firm may influence liquidity of the stock. Active shareholders
may reduce liquidity of stocks by spending more time and money in monitoring manager’s actions.
Moreover Liu (2013) argued that higher institutional ownership leads to increased stock liquidity.
Institutional ownership increases stock liquidity as institutional investors have more access to informa-
tion, potential ability to trade against liquidity risk and they are less likely to be motivated by sentiments
than individual trades (Baker & Stein, 2004). Stock liquidity also lowers cost of equity issuance (Sharma
& Paul, 2015).
Many other trading patterns of institutional ownership could also affect stock liquidity in the cross
section, each associated with a different type of institutional ownership. Uno and Kamiyama (2010)
reported that a firm’s ownership structure can influence stock liquidity. Their finding suggests that both
Ali and Hashimi 5

adverse selection cost and investment horizon of firms stocks have negative effect on market liquidity.
They also found an inverse and significant relationship between concentration ownership and stock
liquidity. Furthermore, Lee and Chung (2015) observed that the percentage of shares held by foreign
ownership increases the price impact of trades and the result of large foreign ownership is a decrease in
bid-ask spread. Foreign investors bring an advantage to the market, in that they lower transaction costs
by increasing competition in the price discovery process. Overall increase in the number of foreign
investors in emerging markets after the global financial crisis brings higher price impacts and lower
spreads in the financial market.
Likewise, Lee and Chung (2015) find that foreign ownership increases stock market liquidity, which
supports the trading hypothesis. Moreover, the possibility that decreases in liquidity or increases in mar-
ginal costs in the financial market may limit foreign investors who are liquidity providers in the market.
Yosra and Sioud (2011) found that ultimate structure of ownership remains concentrated in the main-
stream of the Tunisian Stock Exchange-listed firms. They also showed that market liquidity of stock
significantly decreases with concentrated ownership.
Recently, Ajina et al. (2015) reported that the percentage of institutional investors is significantly and
positively associated with stock liquidity, which endorses the signal theory and the trading hypothesis of
liquidity. However, their results do not prove any significant relationship with the adverse selection
element of information asymmetry. Their results also reveal that pension funds increase stock liquidity
because they manage assets, which reduce transaction costs and increase liquidity in the market.
Institutional ownership predicts higher equity returns and the stock prices of stock with higher institu-
tional ownership should reflect a greater part of future profits (Yan & Zhang, 2009).

Methodology

Sample and Data Collection

Our sample consists of 84 non-financial companies listed on KSE (Karachi Stock Exchange) from 2005
to 2014. Financial data related to stock prices and shares traded are retrieved from the business recorder
and other electronic sources (e.g. KSE website, State Bank of Pakistan). Data related to institutional
ownership for three different institutional investors (Banks, Investment companies and insurance
companies) are collected from annual reports of 84 selected firms.

Measurement of Stock Liquidity

Liquidity is an elusive concept, which contains broad-based meaning and numerous explanations.
It cannot be observed directly. Due to this ambiguous nature of liquidity, researchers have suggested
many proxies in different dimensions to measure stock liquidity. This study used turnover ratio to
measure liquidity which is proposed by Datar, Naik and Radcliffe (1998). This measure has been used in
the studies of Aitken and Forde (2003), Barinov (2014) and Prommin, Jumreornvong and Jiraporn
(2014). Although other liquidity measures require CRSP data, bid-asked data, calculation of microstruc-
ture data on transactions and quotes that are unavailable in Pakistani market for long periods of time, this
measure outperformed other methods such as Roll (1984) measure, LOT measure (Hasbrouck, 2004),
Amihud measure (2002) and Effective tick spread (Goyenko, Holden, & Trzcinka, 2009). Due to the
availability of data and their high correlation with stock liquidity, Datar et al. (1998) measure is
6 Global Business Review 19(4)

considered as one of the appropriate methods for this study. Formula and method of calculation is
described in the following:
shares traded during year 1
Turnover rate =
outstanding shares in year 1

Measurement of Institutional Ownership

Institutional ownership is calculated by summing the total shares held by different institutional investors
at time t divided by the total number of shares outstanding at time t, which determines the share of
institutional investors in a company for that year. Following formula has been used to measure institu-
tional ownership:
total shares held by institutions at time t
Institutional ownership =
total number of outstanding shares at time t

Ownership for each type of institution is calculated as the ratio of shares or stocks held by each firm
in period t to the total number of outstanding shares of company in time t.

Control Variables
Literature suggests following variables beyond institutional ownership that can affect liquidity of stock
in the cross sections.
Price volatility could affect stock liquidity in the cross section. For instance, Heflin and Shaw (2000)
and Chae (2005) have found a positive relationship between illiquidity and the price volatility of stock.
Therefore, we include price volatility as a control variable, and it is calculated by using the annual
average of the standard deviation of equity return.
Firm leverage is also used as a control variable because high-leveraged firms are considered to be
monitored by debt holders that can affect stock liquidity (Harris & Raviv, 1991). Use of high leverage
exposes illiquidity because lenders can suddenly withdraw their finance at any time (Cao & Petrasek,
2014). Many studies find that higher firm leverage is cross sectionally associated with higher spreads
and illiquidity. In literature, different proxies are used to measure the firms’ leverage. Titman and Wessels
(1988) used book value of debt over book value of debt plus market value of equity as measure of finan-
cial leverage. However, this study used ratio of interest-bearing debt over total market value of equity to
measure firms’ leverage.

Model Specification
In order to empirically examine the relation between institutional ownership and stock liquidity, we used
a linear multivariate regression, which is extensively used in previous finance literature. This study used
lag term to investigate the effect of previous period of predictors on current year stock liquidity.

TURNOVERi, t =β0 +β1 INSTITUTIONAL OWNERSHIPi,t–1+ β2 CONTROLSi,t–1+ fi,t

Ali and Hashimi 7

Table 1. Definition of Variables used in this Study

Determinants Computation/Definition/Proxies Studies using the measure

Liquidity shares traded during year 1 Datar et al. (1998) and Prommin
Turnover ratio =
outstan ding shares in year 1 et al. (2014).
Ownership by
1. Investment companies Institutional ownership/ Ownership by Rubin (2007), Agarwal (2009) and
different institutions is measured through Shaikh et al. (2012).
following formula:
2. Insurance companies Total shares held by institution at time t
Total number of outstanding shares at time t
3. Banks
Price volatility Annual average of standard deviation of Ajina et al. (2015)
equity return
Firm Leverage Ratio of interest bearing loan over total Harris and Raviv (1991) and
market value of equity. Cao and Petrasek (2014)
Source: Authors’ collections from literature.

Turnover i, t = b 0 + b 1 InsO i, t-1, + b 2 PV i, t-1 + b 3 LEVi, t-1 + f i, t(i)

Turnover i, t= liquidity of different stock at time t
β0 = intercept
β1InsOi,t–1= Lag term of Institutional ownership
PV i, t–1 = Lag term of control variable Price volatility
β3LEVi,t–1 = Lag of control variable Firm leverage
fi,t = error term

We conduct collective and individual level analysis, control for stock characteristics that are associ-
ated ex ante with stock liquidity. Specifically, we estimate cross sectional regressions of firm-level
liquidity (turnover ratio) on past period institutional ownership while controlling for a wide range of
lagged stock characteristics. Institutional ownership is further divided into following institutions:

Turnover i, t = b 0 + b 1 InsO i, t- 1, + b 2 InvO i, t-1 + b 3 BO i, t-1 + b 4 PV i, t-1 + b 5 LEVi, t-1 + f i, t(ii)

where Turnover i, t= stock liquidity for the ith stock in year t, β0 = intercept β1InsOi,t–1= vector of the frac-
tions of shares held by insurance companies at the end of the year t for the stock i, β2InvOi,t–1 = vector of
the fractions of shares held by investment companies at the end of year t, for the stock i β3BOi,t–1 = vector
of ownership by banks at the end of the year t for the stock i, β4PV i, t–1= vector of control variable price
volatility at the end of the year t for the stock i, β5LEVi,t–1 = vector of control variable leverage at the end
of the year t for the stock i, and fi, t = error term.

Fixed Effects Model

To investigate the impact of institutional ownership on stock liquidity, we employed fixed effects model
because it is a reasonable method to do with panel data, and also it provides reliable results. Fixed effects
is selected as the best fit model for the investigation by employing both Hauseman and Likelihood test
to panel data which depicts a significant chi-square value for fixed effects model. Results of both
Hauseman and Likelihood test showed that fixed effects model is the best fit model.
8 Global Business Review 19(4)

Empirical Results

Descriptive Statistics
Table 2 exhibits the statistical behaviour of the data for the period of 2005-2014, which shows descrip-
tive statistics on stock liquidity and institutional ownership (ownership by banks, investment and
insurance companies) and other control variables (price volatility, leverage). The mean ranges from
0.049 (insurance companies) to 0.0913 (stock liquidity). Standard deviation, which is the measure of
dispersion or deviation from the mean, ranges from 0.07 (insurance companies) to 0.7166 (Firm lever-
age). Skewness indicates that most of the values are positively skewed, whereas kurtosis shows that the
data are tall and have high tail.
Table 3 reports correlations between stock liquidity and explanatory variables, which stay at around
0.2. Pearson’s correlation is used to investigate whether endogeneity problems exist or not in between
the independent variables. In Table 3, we can see that there is no problem of multicollinearity and
endogeneity exists in between all independent variables. Values of all variables are below the limit of
0.80, the high value is even below 0.20 limits. The overall result indicates that ownership by insurance
companies is positively correlated with all other predictors. Likewise, results also reveal that ownership
by investment companies is positively correlated with other variables but bank ownership is negatively
correlated with investment companies’ ownership. Similarly, correlation among bank ownership, price
volatility and firm leverage is negative.

Table 2. Descriptive Statistics

LIQ I_O t–1 INS_Ot–1 INV_Ot–1 B_O t–1 PV t–1 LEV t–1
Mean 0.0913 0.2777 0.0496 0.0897 0.0476 0.0876 0.8449
Median 0.0667 0.233 0.034 0.0658 0.0284 0.0655 0.6503
Maximum 0.8047 0.9980 0.7625 0.7501 0.9259 0.6292 2.7929
Minimum 0.0029 0.1208 0.000 0.0000 0.000 0.0009 0.0104
Std. Dev 0.0843 0.1533 0.0702 0.0816 0.107 0.0732 0.7166
Skewness 4.0266 2.7284 4.9207 3.8403 5.5615 2.9605 0.8961
Kurtosis 26.2901 11.3545 37.616 24.9707 37.1781 15.0287 2.8184
Observations 756 756 756 756 756 756 756
Source: Authors’ Findings.

Table 3. Correlation Matrix

Insurance Investment
companies companies Bank ownership Price volatility Firm leverage
Insurance companies 1.0000
Investment companies 0.0626 1.0000
Banks ownership 0.0861 −0.0033 1.0000
Price volatility 0.0762 0.9311 −0.0327 1.0000
Firm Leverage 0.5347 0.0189 −0.0333 0.0394 1.0000
Source: Authors’ Findings.
Ali and Hashimi 9

Regression Analysis
To estimate the impact of institutional ownership on liquidity, we applied fixed effect model (FEM) as
the data were panel data. This was further selected as the best model for the estimation by applying two
tests which rolled the dice in favour of Fixed Effects Model. Following two models have been tested for
collective and individual level analysis. In the first model, three different types of institutional ownership
were regressed with stock liquidity, and then in the second model, regression analysis was applied to the
combine institutional ownership with stock liquidity.
Model 1 in the below table indicates that an increase of 1 point in investment companies and bank
ownership leads to 0.53 and 0.057 points increase in stock liquidity, respectively. The coefficients of
investment companies and bank ownership are positive and statistically significant, whereas t-statistic of
insurance companies is 0.61, which implies that relationship between insurance companies’ ownership
and stock liquidity is positive and insignificant. Model 2 reveals that institutional ownership affects
stock liquidity even after controlling for other variables. These results are consistent with Hypotheses 1,
3 and 4 while inconsistent with Hypothesis 2. In general, institutional ownership is likely to improve
stock liquidity. These results are consistent with the findings of Liu (2013) and Lee (2011) that institu-
tional ownership is positively associated with stock liquidity. The increased participation of institutional
investors in stocks increases liquidity of that stock in the cross section. This result is also consistent
with the trading hypothesis, that is, long-term institutional investor trades aggressively which decreases
transaction cost and improves liquidity of securities.
Moreover, we distinguish between the ownership of different types of institutional investors such
as investment companies, insurance companies and banks. Model 1 shows insignificant relationship
between insurance company’s ownership and stock liquidity. Whereas previous studies like Chao and
Petrasek (2014) and Ajina et al. (2015) reported that ownership by insurance company could affect
liquidly of stocks, these varying findings indicate that the results of this hypothesis cannot be general-
ized; it will depend on the context where it is being examined.
Model 1 also shows that bank ownership has a significantly positive relationship with stock liquidity.
This result is in line with the finding of Baker and Stein (2004) and Gatev and Strahan (2006); they
found a positive relationship between bank ownership and liquidity. This shows that bank ownership
has potential ability to influence firm management decision, thereby improving liquidity of stock.
Model 1 also reveals that there exists a positive relationship between investment companies’ ownership
and liquidity. This result is consistent with the findings of Chao and Petrasek (2014). They showed that
the increased participation of investment companies’ investors in stock holding leads to higher stock
liquidity, whereas model 1 and 2 both depict that price volatility and leverage are inversely related with
stock liquidity.
Furthermore, in Table 4 value of R2 is 0.5146, it implies that 51.46 per cent stock liquidity is explained
by model 1 (combination of predictors), whereas model 2 explains 48 per cent variation in the dependent
variable. Moreover, value of F-statistics (probability) is highly significant, which shows that both models
are correct. The independent variables, except ownership by insurance companies, significantly affect
stock liquidity in the cross section. The result shows that there exist a significant relationship between
ownership by institutions (except insurance firms) and stock liquidity. This implies that our finding is
consistent with the previous studies, where the prediction is that institutional ownership improves stock
liquidity comparatively.
10 Global Business Review 19(4)

Table 4. Fixed Effect Model

Model (1) Model (2)

Coefficients t Statistics Std. Error Coefficients t Statistics Std. Error
C 0.0746 7.0526 0.0094  
INS_O t–1 0.0229 0.6132 0.0187
INV_O t–1 0.5320*** 5.9604 0.0890
B_O t–1 0.0573** 2.4403 0.0228
PV t–1 −0.3284** −3.2956 0.0966 −0.143** −2.910 0.0491
LEV t–1 −0.0078* −2.0683 0.0045 −0.008* −1.978 0.0607
I_O t–1 – – – 0.052*** 2.649 0.0199
(Prob) F-Stats 0.0000 0.0001
R-Square 0.5146 0.4869
Adj. R-Square 0.4505 0.4209
Observations 756     756    
Source: Authors’ Findings.
Notes: This table presents the results for the linear panel data models using Fixed effects. In Model (1) and (2) the dependent
variables is stock liquidity. Model 1 shows individual level analysis and Model 2 shows combined effect of institutional
ownership on stock liquidity. P<.05 = *, P<.01 = ** denote that the coefficient is statistically significant at 5 per cent and
1 per cent. Cross section and period fixed effects tables are listed in appendixes.
  (i) I_O—Institutional ownership
(ii) B_O—Bank ownership
(iii) INS_O—Ownership by insurance companies
(iv) INV_O—Ownership by investment companies
(v) PV—Price volatility
(vi) LEV—Leverage

Conclusion and Policy Recommendations

This study examines the relationship between institutional ownership and stock liquidity. We used a
sample size of 84 non-financial companies listed on the Karachi stock exchange for a period of 10 years,
starting from 2005 to 2014. Turnover ratio has been used to measure the stock liquidity, whereas institu-
tional ownership is measured by dividing the number of stocks held by institutions from total number
of outstanding shares. This study employs fixed effect model which shows that magnitude of institu-
tional ownership in Pakistani firms tend to significantly increase stock liquidity in the cross section.
This study also finds that as institutional ownership increases, liquidity of stock improves in Pakistan.
This is consistent with the trading hypothesis that increase in institutional ownership leads to decrease in
liquidity risk and increases stock liquidity by reducing transaction costs.
Second, we find that ownership by investment companies is positively associated with stock liquidity
and negatively related to liquidity risk, which is in line with the findings of former studies. Subsequently,
we find insignificant relationship between ownership by insurance companies and liquidity in Pakistan;
this is not consistent with previous literature. It is due to the fact that former researches carried same
study in developed markets, whereas emerging markets have different preferences than advanced
markets. Finally, we show that bank ownership is positively related with liquidity of stock, which is
consistent with previous findings.
Generally, our evidence supports that many but not all institutional investors play a positive role in
improving stock liquidity in emerging markets. Previous literature on the relationship between institu-
tional ownership and stock liquidity primarily concentrated on institutional ownership as a homogeneous
Ali and Hashimi 11

group, whereas some studies document that not all institutions are the same in terms of their effect on
liquidity and considering total institutional ownership can produce inappropriate outcomes. We recom-
mend that the relationship between institutional ownership and stock liquidity is conditional on institu-
tion type because we expose that not all institutions effect liquidity in the same way. Furthermore, we
argue that the positive relation between total institutional ownership and stock liquidity reported in
previous literature is mainly driven by the homogenous institutional ownership. The results of this study
are important for dealers, traders and brokers, in the sense that they can facilitate investors in efficient
resource allocation and in making investment-related decisions.
Based on the facts and information, it is recommended that regulating authorities should enable the
firms to show and disclose relevant information regarding their financial performance. This will reduce
information asymmetry in the financial market and encourage small investors. Institutional owners
perform the role of watch dogs in any organization, so, institutional ownership should be enhanced. It is
also recommended that corporate law authorities should encourage shareholders and due protection
should be given to them in a crisis situation. This could be done by formulating strategies and events
through which investors can approach responsible organizations in case of any mismanagement in a
firm’s affairs.

Acknowledgements
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Notes
1. Liquidity means stock liquidity which is defined as ‘quickly buy or sell of stock without any significant loss and
with no price impact’.
2. Institutional ownership is the percentage of shares held by different institutions.
3. For data collection, we consider only the firm’s stock for which information on prices and trades data are
available.
4. Stocks of financial firms are excluded from the sample.
5. Refer Datar et al. (1998) and Prommin et al. (2014) for more details on liquidity proxy (turnover ratio).

References
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