Ownership Structure and Stock Liquidity: A Taiwan Study

This study uses firms listed in Taiwan from 2009 to 2018 as samples to inves-tigate the correlation between ownership structure and stock liquidity. The results indicate that blockholder and institutional ownership have a nonlinear effect on stock turnover rate except the firms with low stock liquidity and profitability. The inflection point of institutional ownership has a pronounced change after including the interaction effect of low stock liquidity or operation deficits. Besides, low stock liquidity and operation deficits have a moderating effect on ownership structure and stock liquidity. The low stock liquidity aggravates the negative effect of blockholder ownership on the stock turnover rate and changes the effect of institutional ownership on the stock turnover rate from positive to negative. The operating deficits weaken the negative effect of blochholder ownership and lessen the positive effect of institutional ownership on the stock turnover rate.


Introduction
Stock liquidity is the ability for stock to be transacted quickly and at a low cost.
It is a key factor market investors consider when making investment decisions.
The literature has revealed that investors prefer stocks with high liquidity (Boubakri et al. [1]; Thapa and Poshakwale [2]). According to the minority shareholder expropriation theory, ownership concentration increases the potential of majority shareholders to expropriate minority shareholders (Yeh and Woidtke [3]), which often leads to problems of agency between controlling and minority shareholders (Claessens et al. [4]; Young et al. [5]). Therefore, high blockholder sek [9]; Chordia et al. [10]). Furthermore, according to the institutional investor theory, institutional investors can act as supervisors, improving the quality of corporate governance, reducing agency costs, and increasing market participants' confidence and stock liquidity (Baker and Wallage [11]; Chung et al. [12]; Jain et al. [13]). Accordingly, this study explores the effects of blockholder and institutional investors on stock liquidity from the perspective of ownership structures. This is an important issue for an emerging market with high ownership concentration by dominant shareholders and for a thin market (or a small market) led by retail investors let it is easy to manipulate the stock market for the institutional investors.
Taiwan's stock market is a small market, and the structure of investors is consisting of many individual investors. The market is deeply influenced by institutional investors. The individual investors' behaviour usually follows institutional investors which dominate the stock market. In Taiwan, deadstock (or zombie stock) is defined as money-losing stock or stock that has a low trading volume (e.g., an average daily trading volume of fewer than 100,000 shares) for a long period of time. To solve the problem of deadstock, the Taiwan Stock Exchange promulgated a stock delisting regulation in March of 2019 that specifies that listed companies determined by certified accountants in audit reports to have major uncertainties regarding their continued operation or to have stock with a net asset value per share of less than NT$3 must make improvements within 3 years; if improvements cannot be made within this time, the firm's stock will no longer be traded and will be delisted after 6 months. On July 1, 2021, market making for quality stock with low liquidity was performed to increase investors' trading opportunities, enhance stock liquidity, and attract more capital investment in the Taiwan Stock Market. The inclusion criteria for quality stock with low liquidity are a stock listed for 1 year with a relatively low average daily trading volume, turnover rate, and volatility; no operating deficits in the year preceding; earnings per share higher than NT$2; and dividends in the year preceding. Whether operating deficits and profitability differential results in the low stock liquidity group is an important issue that stock exchange regulators, corporate governance, and investors care about. Accordingly, this study also investigates the interactive effect between low stock liquidity and operating deficits.

Literature Review
The ownership has a significant effect on bank liquidity (Díaz and Huang [14]).
Research reveals that firms with decentralized ownership have higher agency costs, and the shareholders of such firms generally have a lower motivation to supervise the firms, which results in free-rider problems and expropriation by managers (Grossman and Hart [15]). Therefore, the higher ownership dispersion does not improve market liquidity (Omet [16]). According to the minority shareholder expropriation theory, ownership concentration can reduce managers' discretionary power, leading majority shareholders to have more influence and the power to intervene in a firm's decision-making to benefit themselves.
Under such circumstances, agency problems between controlling and minority shareholders are likely to occur (Claessens et al. [4]; Young et al. [5]). Furthermore, majority shareholders are assumed to possess private information, leading to information asymmetry and thus a higher adverse selection cost. As a result, concentrated ownership structures via the threat of informed trading, adversely affect stock trading activity (Leaño and Pedraza [17]). Firms with more concentrated ownership experience significantly lower stock liquidity (Attig et al. [6]; Prommin et al. [7]; Brockman et al. [18] [20]). However, firms with higher institutional ownership have narrower spreads, higher market quality index, and smaller price impact of trades (Jiang et al. [21]). Hence, firms may alleviate information asymmetry and improve stock market liquidity by increasing institutional ownership. On the other hand, the trading effect and herding behavior are likely to increase stock liquidity (Cao and Petrasek [9]). The conventional wisdom states that institutional investors improve market efficiency by correcting mispricing. Their participation helps enhance liquidity by promoting trade activities and price discovery (Ding et al. [22]; Luo et al. [23]). Nevertheless, institutional investors' speculation behaviour and their destabilising effect on the stock market (Kong and Kong [24]) may increase firm-level stock return volatility (Chen et al. [25]). Besides, from the corporate governance perspective, firms with higher institutional ownership have significant future improvements in shareholder rights, consistent with shareholder activism (Bushee et al. [26]). Therefore, higher institutional ownership is associated with greater management disclosure, analyst following, and liquidity, resulting in lower information asymmetry, which enhances monitoring and decreases trading costs (Boone and White [27]). Theories on institutional investors and active monitoring propose that high institutional ownership encourages institutional investors to monitor corporate management (Baker and Wallage [11]; McCahery, et al. [28]), which improves corporate governance, reduces agency costs, enhances investors' confidence, and thus increases stock liquidity (Jain et al. [13]; Chung et al. [12]).

Data and Methodology
The firms listed in Taiwan  shares is used as the criterion to divide the samples into two groups (i.e., high and low liquidity). In total, 3178 observations with an average daily trading volume < 100,000 shares (low stock liquidity group), which comprise 21.92% of the total observations, and 11,319 observations with an average daily trading volume ≥ 100,000 shares (high stock liquidity group), which comprise 78.08% of the total observations.
In Equation (4), the cross-multiplying term loss × ownership is incorporated to determine the interactive effects of operating deficits and ownership structure. In Equation (5), the cross-multiplying term lowliq × loss × ownership is added to analyze the interactive effects of ownership structure and a firm with both low stock liquidity and operating deficits. In these models, turnover is the stock turnover rate; ownership is the ownership structure; lowliq is a dummy for low stock liquidity; loss is a dummy for operating deficits; Z is the firm-specific characteristics; industry is the three industries; i u and t δ are firm-effects and year-effects, respectively; and it ε is the residual term. To prevent contemporaneous endogeneity in variables, loss and Z are all-time lag of one period (t − 1) data. Moreover, in Equations (1)-(5), the groupwise heteroscedasticity and contemporaneous correlation of the firms and periods are considered to reduce regression coefficient estimation bias in the panel data models.

Empirical Results
The descriptive statistics and the two-sample t-test for the difference between the mean are presented in Table 2. There is great heterogeneity in the two groups. In the low stock liquidity group, the stock turnover rate lies between 0.13% and 13.33%, while the standard deviation is 1.533%; blockholder ownership lies between 3.59% and 59.83%, while the standard deviation is 13.326%; institutional 1 Chia et al. [35] [36] provide evidence of a nonlinear relationship between the number of shareholders and liquidity, and while more shareholders are associated with higher liquidity in Malaysia Market. However, Prommin et al. [7] suggest that there is no evidence that the relationship between ownership and liquidity is a nonlinear in Thailand market.   Note: The definition for the variables is presented in Table 1. VIF is the variance inflation factor.
the collinearity between the variables is not serious.
The results of ownership structure and stock liquidity are displayed in Table   4. In Model 1, the coefficients of blockholder and institutional ownership are −0.1454 and −0.0645, respectively. The result shows that ownership has a significant negative effect on the stock turnover rate, which is consistent with findings of prior studies, indicating that higher cost of agency problems and adverse selection are often caused by high blockholder ownership which adversely affects stock trading activity (Claessens et al. [4]; Young et al. [5]; Attig et al. [6]; Prommin et al. [7]; Brockman et al. [18]; Leaño and Pedraza [17]), and that institutional ownership could reduce stock liquidity through the information effect (Bushee and Goodman [8]; Bae et al. [20] [11]; Ding et al. [22]; Luo et al. [23]). However, institutional investors have an adverse effect on the stock turnover rate at a high ownership level. 3 The endogeneity may be present between ownership structure and stock liquidity, the dynamic GMM (Arellano and Bover [37]; Blundell and Bond [38]) is adopted for analysis. The results reveal that ownership structure has a nonlinear effect on the stock turnover rate.      [9]; Ding et al. [22]; Luo et al. [23]). Furthermore, institutional investors have an advantage in information about a firm with operating deficits, the firm's stock turnover rate would decrease with a rise in institutional ownership (Bushee and Goodman [8]; Bae et al. [20]).   The results of firms with operating deficits and those with profitability in high and low stock liquidity groups are displayed in Table 5. In the low stock liquidity group, blockholder ownership has a nonsignificant effect on the stock turnover rate of firms with operating deficits, but has a significantly negative effect on the stock turnover rate of firms with profitability. By contrast, institutional ownership has a significantly nonlinear effect on the stock turnover rate of firms with operating deficits, but has a nonsignificant effect on the stock turnover rate of firms with profitability. Generally, institutional investors are a symbolic indicator of good corporate governance for a firm. Firms with operating deficits is interested by institutional investors, their stock liquidity will increase (Baker and Wallage [11]; Jain et al. [13]; Bushee et al. [26]; Boone and White [27]; McCahery, et al. [28]; Chung et al. [12]). Nevertheless, for firms with profitability, blockholders may be questioned the adequacy of the firms' corporate governance, which reduces their stock liquidity (Claessens et al. [4]; Young et al. [5]; Attig et al. [6]; Prommin et al. [7]; Brockman et al. [18]). In the high stock liquidity group, blockholder and institutional ownership have a nonlinear effect on the stock turnover rate of firms with operating deficits and those with profitability.

Conclusions
Stock liquidity is a key factor market investors consider. Most of the literature has focused on stock liquidity from the perspective of market transactions. This study analyzes the effects of blockholder and institutional ownership on firms' stock liquidity as well as the interactive effects between low stock liquidity and operating deficits. First, the results demonstrate that the effects of blockholder and institutional ownership on stock turnover rate are nonlinearity except for the firms with low stock liquidity and profitability. The inflection point of institutional ownership has a pronounced change after including the interaction effect of low stock liquidity or operation deficits. This provides implications for an emerging market with high ownership concentration by dominant shareholders and for a thin or small market led by retail investors let it is easy to manipulate the stock market for the institutional investors. Second, this study uses interaction terms to examine whether operating deficits and profitability differential results in the low stock liquidity group or whether the low and high stock liquidity firms with operating deficits yield differential results. The results reveal that the low stock liquidity aggravates the negative effect of blockholder ownership on stock turnover rate, and changes the effect of institutional ownership on stock turno- overbuying and overselling on stock liquidity could also further to be investigated.

Conflicts of Interest
The author declares no conflicts of interest regarding the publication of this paper.