The Impact of Institutional Shareholdings on Price Limits
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The Impact of Institutional Shareholdings on Price Limits Manhwa Wu1 · Paoyu Huang2 · Yensen Ni3
© Springer Japan KK, part of Springer Nature 2019
Abstract We explore whether institutional shareholders would affect the price limits in Taiwan due to that the price limit system in Taiwan is lower than those of other countries. In this study, We reveal that various institutional shareholding ratios including domestic institutional shareholding ratio and foreign institutional shareholding ratio significantly affect several stock limit ratios including the stock limit ratio, stock price up-limit ratio, and stock price down-limit ratio rarely concerned comprehensively in the relevant studies. In addition, we argue that our interesting findings are likely interpreted as follows: First, domestic institutions might buy stocks to price up-limit to improve their performance. Second, institutional investors might beat their competitors by selling competitors’ stocks to price down-limits. Third, foreign institutions might sell stocks to price down-limits after taking many short positions in index futures. We deduce that the Taiwan price limit system might provide opportunities for institutional investors, stakeholders, and even insiders to manipulate share prices because the price limit likely occurs in Taiwan Stock Exchange. Keywords Board structure · Price limits · Institutional shareholdings JEL classification G30 · G32 · G38
1 Introduction The stock market of Taiwan, one of the developing countries, is a small stock market in the beginning. Thus, high volatilities occurred in this stock market as well as stock market crash resulting from falling share price sharply might not beneficial for the economy, so the price limit is set as 5% at the early stage of Taiwan stock * Yensen Ni [email protected] 1
Department of Finance, Ming Chuan University, Taipei 111, Taiwan, ROC
2
Department of International Business, Soochow University, Taipei 100, Taiwan, ROC
3
Department of Management Sciences, Tamkang University, No.151, Yingzhuan Rd, Tamsui Dist, New Taipei 25137, Taiwan, ROC
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market. Besides, the political concern between Taiwan and Mainland China might be another reason to set a rather narrow price limit for Taiwan stock market as well. With the development of economy in Taiwan, a sound stock market would be beneficial for the economy; however, if price limit is too narrow, investors might not able to buy (sell) shares when share price hits the price up-limits (price down-limit) resulting in trading volume shrunk. Thus, the authority expands price limit from 5 to 7% at Oct. 2, 1989. In fact, price limits mainly prevent the stock prices from falling sharply resulting from unexpected internal or external event occurred. Thus, implementing a price limit system is feasible to mitigate the share price overreaction. However, share prices are probably twisted by the price limit mechanism in Taiwan. For example, if the stock price increases extremely, investors might not procure s
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