Intraday market liquidity, corporate governance, and ownership structure in markets with weak shareholder protection: ev
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Intraday market liquidity, corporate governance, and ownership structure in markets with weak shareholder protection: evidence from Brazil and Chile Diego C. Cueto • Lorne N. Switzer
Ó Springer Science+Business Media New York 2013
Abstract This paper investigates the effects of very highly concentrated ownership structures on the liquidity of stock markets in a context of weak protection for minority shareholders. Such structures are prevalent in a number of European markets as well as in various developing markets, as opposed to US markets. Two alternative hypotheses are tested. The shareholder expropriation hypothesis predicts an inverse relationship between liquidity and ownership concentration for the dominant shareholder. The dominant monitor-insider hypothesis contends that dominant shareholders are not detrimental to market liquidity, since they have incentives to reduce their costs of exit and/or to improve the information transfer of their value enhancing activities to markets. Our empirical results are more consistent with the latter. We find that alternative governance mechanisms also have liquidity enhancing effects for Brazilian and Chilean firms. In particular, crosslisting in the US market and the threat of outside takeovers serve as monitoring devices to reduce informational asymmetries. Keywords Corporate governance Ownership concentration Liquidity Emerging markets
D. C. Cueto Universidad ESAN, Alonso de Molina 1652, Lima 33, Peru e-mail: [email protected] L. N. Switzer (&) John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. W., Montreal, QC H3G 1M8, Canada e-mail: [email protected]
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D. C. Cueto, L. N. Switzer
1 Introduction This paper investigates the effects of ownership structures on the liquidity of stock markets through their interaction with other corporate governance mechanisms in emerging economies within a context of weak shareholder protection. The role of ownership structure on liquidity has been the subject of considerable debate in the literature. Holmstrom and Tirole (1993) present a model in which concentrated ownership hinders the chances of disciplinary hostile takeovers and reduces market liquidity. This shareholder expropriation hypothesis establishes a tradeoff between liquidity and control by large shareholders [see also Bhide´ (1993) and Maug (2002)]. An alternative perspective is the dominant shareholder as monitor-insider hypothesis. In one version of this approach, Coffee (1991) suggests that large shareholders are motivated to increase liquidity in order to reduce their exit costs, which in turn the exit costs of other shareholders. Faure-Grimaud and Gromb (2004) propose that liquidity is desired by dominant shareholder/insiders in order to improve the information transfer of their value-enhancing activities, including monitoring. Chung, Elder, and Kim (2010) allude to the link between corporate governance mechanisms, including ownership structure, that give rise to improved financial and operational transparency, and in
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