Ownership structure, liquidity, and trade informativeness

Transcription

1 Journal of Finance and Accounancy ABSTRACT Ownership srucure, liquidiy, and rade informaiveness Dan Zhou California Sae Universiy a Bakersfield In his paper, we examine he relaionship beween ownership srucure (or number of financial analyss following) and liquidiy and rade informaiveness. We find ha insider ownership is negaively correlaed wih liquidiy afer conrolling for price, volailiy, rading volume, and marke capializaion. In addiion, socks wih higher insiuional ownership or larger number of financial analyss following have beer liquidiy. Furhermore, we find a sock wih higher insider and insiuional ownership has higher informaiveness of rades. These resuls imply ha here is more informed rading for socks wih higher insider and insiuional ownership, and marke makers believe ha insiders and insiuional invesors are informed raders. Keywords: insiders, financial insiuions, financial analys, liquidiy, rade informaiveness Ownership srucure liquidiy, Page 1

2 Journal of Finance and Accounancy 1. INTRODUCTION For he las couple of decades, financial researchers have debaed over who is informed and who can access beer informaion. Lieraure documens ha insiders, financial insiuions, and financial analyss could access or have beer informaion han individual invesors. The insiders could have beer informaion ha is no fully refleced in he sock price a ha poin. Supporing he argumen, Seyhun (1986) finds ha insiders make abnormal reurns in rading heir company s sock, and ha heir rading has a significan influence on heir company s sock price. In addiion, Demsez and Lehn (1985) and Denis and Denis (1994) find ha firm managers wih high insider ownership have informaion advanages. Also, insiuional invesors may have beer informaion han individual invesors even hough hey may no be able o access as much informaion as rapidly as insiders. The insiuional invesors may use heir resources o access he informaion ha individual invesors are no able o access. Chiang and Venkaesh (1988) assume ha insiders and insiuional invesors creae informaion asymmery because hey know more han individual invesors. The auhors show ha he bid-ask spread is no relaed o insiuional ownership bu is significanly posiively relaed o insider ownership. In addiion, Grullon and Wang (001) assume ha insiuional invesors are informed raders and individual invesors are uninformed raders because insiuional invesors have an advanage by exploiing economies of scale in informaion acquisiion and processing. Chung e al. (1995), Brennan and Subrahmanyam (1995) and Easley e al. (1998) performed sudies on financial analyss following in he microsrucure area. Chung e al. (1995) find ha financial analyss end o follow socks wih greaer bid-ask spreads. Van Ness, Van Ness, and Warr (001) also show ha he adverse selecion componen of he bid-ask spread is posiively relaed o he number of analyss following a firm. Womack (1996) use he number of financial analyss following as a proxy for he amoun of informaion available on a firm. However, Brennan and Subrahmanyam (1995) find ha firms wih more analyss following exhibi beer liquidiy such as smaller bid-ask spread and larger deph. In addiion, Easley e al. (1998) documen ha he number of analyss following a firm is no a good proxy for informaional asymmery. Therefore, he relaionship beween financial analyss following and sock marke liquidiy and informaion asymmery remains a research quesion. Moreover, because insiders may be able o access beer informaion han insiuional invesors or financial analyss, here is a clear relaionship beween insider ownership and informaion asymmery. If insiders do have beer informaion, a marke maker s rading sraegy for a sock wih high insider ownership would be differen from one wih low insider ownership. Also, as menioned, insiuional invesors and financial analyss may have an informaional advanage because hey can exploi economies of scale in informaion acquisiion and processing. Thus, a marke maker s rading sraegy for a sock wih high insiuional ownership and/or a large number of analyss following would be differen from ha of companies wih low insiuional ownership and/or a small number of analyss following. Higher informaion asymmery may drive a sock wih high insider ownership o have wider spreads han hose wih low insider ownership. Kyle (1985), Copeland and Galai (1983), and Glosen and Milgram (1985) predic ha greaer informaion asymmery beween informed and liquidiy raders will lead o wider spreads. Insiders could be eiher informed raders or liquidiy providers, bu boh sell heir socks when hey believe he socks are overvalued and buy socks when hey believe he socks are undervalued. They could assess he inrinsic value Ownership srucure liquidiy, Page

3 Journal of Finance and Accounancy of socks wih beer informaion. Marke makers, herefore, increase heir spreads o proec heir profis or loss from informed raders who have superior informaion over marke makers or liquidiy raders. In addiion, Lee e al. (1993) and Kavajecz (1999) find ha marke makers boh widen he spreads and decrease he dephs a imes of high informaional asymmery or rade wih possible informed raders in order o manage heir informaion asymmery risk. On he oher hand, relaionships beween spreads and he insiuional ownership or analyss following are no clear because higher insiuional ownerships are concenraed on larger firms and more analyss follow larger firms. This means ha he percenage of insiuional ownership and he number of analyss following are posiively correlaed wih firm size and rading volume. As oher researchers have noed, he firm size and spreads are negaively relaed. This indicaes ha a firm wih higher insiuional ownership or wih more analyss following may have smaller spreads han a firm wih lower insiuional ownership or a smaller number of analyss following. Therefore, in his evidence, he spreads may no be a good proxy for informaion symmery if we do no conrol oher variables such as price, volume, marke capializaion, and volailiy. There are wo empirical sudies invesigaing he issue of ownership srucure and informaion asymmery. Sarin e al. (000) find ha higher insider and insiuional ownership are boh associaed wih wider spreads and smaller deph. Dennis and Weson (001), however, documen ha insiuional ownership and spreads are negaively relaed. Boh sudies show ha adverse selecion coss and insider ownership have a posiive relaionship. However, he informaion asymmery proposed by Copeland and Galai (1983) and Glosen and Milgram (1985) predic ha greaer informaion asymmery leads o wider spreads. In his paper, we invesigae he relaionship beween ownership srucure (i.e., he percenage of shares held by financial insiuions or insiders) or financial analyss following a firm and liquidiy and rade informaiveness. Alhough his sudy is relaed o ha of Sarin e al. (000) and Dennis and Weson (001), i is differen in several ways. Firs, he mos recen insider ownership daa from Compac Disclosure is used. Anderson and Lee (1997) found ha he Compac Disclosure has he mos reliable ownership daa as compared o oher sources of ownership srucure daa. The sudy by Sarin e al. (000) used oudaed insider ownership daa from 1984 Value Line. Second, we consruc comparable low and high insider ownership socks and direcly compare he relaionship beween insider ownership and informaion asymmery. Our sample shows ha smaller firms have a higher endency oward insider ownership. Chung and Charoenwong (1998) show ha he percenage of insider rading in small firm groups is significanly higher han ha in large firm groups. Therefore, wihou a one o one maching for low and high insider ownership socks, we would have a biased resul for he relaionship beween insider ownership and informaion asymmery. To eliminae his problem, following Huang and Soll (1996), we consruc maching pairs for low and high insider ownership socks. Third, we use Hasbrouck s price impac model o invesigae his relaionship Our findings are as follows: A sock wih higher insider ownership ends o have lower liquidiy (wider spread and smaller deph) afer conrolling for price, volume, marke capializaion, and volailiy. Also, a sock wih higher insiuional ownership or larger number of financial analyss has beer liquidiy. Lasly, our empirical resuls indicae ha insider ownership and insiuional ownership are posiively correlaed wih informaiveness of rades. However, we do no find a similar relaionship for financial analyss following. Ownership srucure liquidiy, Page 3

4 Journal of Finance and Accounancy In secion II and III of his paper, we discuss daa and mehodology, in secion IV, we analyze he empirical resuls, and in he final secion, we summarize he resuls.. DATA For his sudy, he Compac Disclosure 000 is used o deermine he number of shares owned by direcors and officers and he percenage of insiuional ownership. Anderson and Lee (1997) documened ha he Compac Disclosure has he bes ownership daa compared o oher sources. To normalize he size of firms, he number of shares owned by officers and direcors is divided by he oal number of shares ousanding, which gives he percenage of insider ownership for each firm. In addiion, he number of financial analyss following used in his sudy is aken from he Insiuional Brokers Esimaion Sysem (I/B/E/S) daabase. Afer rerieving daa from he Compac Disclosure and I/B/E/S, he original samples are mached wih CRSP by CUSIP. The socks wih average annual share price of less han $5.00 or greaer han $100 are excluded. In addiion o his price filering, he socks ha spli heir shares in he sample period and he socks ha announced splis wihou acual spliing are also eliminaed. This follows he work of Muscarella and Vesuypens (1996), Lipson (1999) and Schulz (000). They find ha he sock splis and spli announcemens affec a sock s volailiy and ransacion coss due o he change in informaion asymmery. They also find ha, afer sock splis, he liquidiy significanly improves. The non-u.s. socks are also deleed because Bacidore and Sofianos (001) find ha he bid-ask spreads for he non-u.s. socks are higher han hose of a mached sample of domesic socks. Afer he filering, he final samples are reduced o 838, 1,491, and 1,53 firms for insider ownership, insiuional ownership and number of financial analyss following, respecively. The quoe and rade daa are rerieved from he NYSE s Trade and Quoe (TAQ) daabase during he period of July o Sepember in 000. Each quoe observaion in he daa file includes icker symbol, quoe dae, ime-samp, bid price, ask price, bid-deph, ask-deph, and exchange code. To clean he daa for errors, he following rades and quoes are deleed: a) rades and quoes if hey were ou of ime sequence or involved an error; b) quoes if eiher he ask price or he bid price were equal o or less han zero; if eiher he bid or ask deph were equal o or less han zero; c) rades if eiher he price or volume were equal o or less han zero; d) quoes wih a spread less han zero or wider han $4; e) quoes and rades relaed o rading hals, before he open and afer he close; e) rades and quoes wih he rade price, ask, or bid change greaer han 10% comparing o he las observaion. Table 1 shows he descripive saisics in he sample period of July o Sepember 000. Share price is he average of daily mid quoes. Reurn volailiy is he sandard deviaion of daily reurns compued using mid-quoe o mid-quoe prices. Daily rading volume is he average daily rading volume over our sample period. We obain he Marke Capializaion from CRSP. Panel A of Table 1 shows ha he mean percenage insider ownership for he sample is 1.8% and, for 75% of firms, he insider percenage ownership is less han 0%. For insiuional ownership, Panel B of Table 1 shows ha he average percenage insiuional ownership is abou 47.56%. In addiion, he number of financial analyss following a firm ranges from 1 o 40 and he average is 9 analyss following a firm. Using hese samples, we invesigae he relaionship beween ownership srucure or he number of financial analyss following a firm and oher variables such as share price, daily rading volume, reurn volailiy and marke capializaion. Table shows ha insider ownership Ownership srucure liquidiy, Page 4

5 Journal of Finance and Accounancy is negaively correlaed wih marke capializaion and rading volume. However, he percenage of insiuional ownership and number of analyss are posiively correlaed wih hose variables. More imporanly, he able shows ha, consisen wih Bhushan (1989), he percenage of insider ownership is negaively correlaed wih insiuional ownership and he number of analyss following a firm. Overall, his resul implies ha smaller firms have greaer endency oward higher insider ownership, and insiuions prefer a large firm o a small firms. In addiion, more analyss follow large firms. 3. METHODOLOGY 3.1. Liquidiy: spreads and deph There are wo ypes of raders in he marke, informed and uninformed raders (liquidiy raders). To minimize heir risk and reduce heir loss o informed raders, marke makers make spreads wider in he presence of informed rading. Especially, Lee e al. (1993) and Kavajecz (1999) find ha marke makers boh widen he spread and decrease deph in imes of high informaional asymmery. Denoe A i,, B i,, and P i, as he ask, bid, and rade prices of sock i a ime, and M = ( Ai, + Bi, ) as quoe midpoin. The compuing procedures for he quoe and percenage i, quoe spreads are as following: Quoed Spread = A i, B i,. Percenage Quoe Spread = (. A i, Bi, ) M i, In addiion o he quoe and percenage quoe spreads, we compue effecive spreads and percenage effecive spreads using evidence from he work of Lee and Ready (1991) ha many ransacions ake place inside he bid-ask spread 1. Chrisie and Huang (1994) and Lee e al. (1993) sugges ha he effecive spread could be a beer measure for ransacion coss han he quoe spread. To compue he effecive spread we used he following equaions. The procedure of Lee and Ready (1991) for ime dispariy beween quoes and rades is followed. Effecive Spreads = P i, Mi, Percenage Effecive Spread = P i, Mi, Mi, Deph is calculaed as he sum of number of shares a ask and bid price per quoaion. 3.. Trade informaiveness Hasbrouck (1991b) Research concerning he informed rading finds ha informaion asymmery can be capured no only by he adverse selecion cos of bid-ask spread, bu also by he price impac of he rade because rades convey he privae informaion. In Hasbrouck (1991b), he assumes ha rades are moivaed by privae informaion and/or exogenous liquidiy needs. The rade impac on he securiy price reflecs wo ypes of effec, ransien and permanen. The permanen impac is due o marke maker s beliefs abou he privae informaion conen of he rade. So he 1 Lee and Ready (1991) found ha 30% of he ransacions in heir sample occurs inside spread. Ownership srucure liquidiy, Page 5

6 Journal of Finance and Accounancy Hasbrouck s (1991b) measure of rade informaiveness is acually a measure of permanen price impac of he rades. The rade informaiveness is derived as follows. Assuming q is he ransacion price or he midpoin of he prevailing bid and ask quoes, q = m + s, where m is he efficien price (he expeced end-of-rading securiy value condiional on all ime- public informaion) and s is a disurbance ha impacs all he ransien microsrucure imperfecions causing q o deviae from he efficien price. The efficien price is assumed o evolve as a random walk, m = m 1 + w, where Ew = 0, Ew = σ and Ew w = 0 for τ x w τ. Assuming x is he signed rade volume, hen he curren rade innovaion is ], which reflecs he privae informaion possessed by informed raders, where E[ x Φ 1 Φ 1 is he public informaion se prior o he rade. The impac of he curren rade innovaion on he efficien price innovaion, i.e. he rade relaed efficien price innovaion, is E [ w x E[ x Φ 1]]. If he absolue measure of rade informaiveness is defined as he variance of rade relaed efficien price innovaion, i should be represened by Var( E [ w x E [ x Φ 1 ]] ) = σ w, x. And he relaive measure is Var ( E[ w x E[ x Φ ]]) σ w, x Var( w ) 1 = σ w = R w. Because he variables, such as efficien price innovaions, are unobservable, he esimaion adops Hasbrouck s (1991a) vecor auoregressive (VAR) model, which is: r = a r + a r + L+ b x + b x + L+ υ x 1 1 = c r 1 1 = q q + c r 0 + L + d x d x 1, + L+ υ where r 1. The innovaions υ1, and υ, are zero-mean, serially uncorrelaed 1 disurbances wih Var ( υ = σ, Var υ ) = Ω, and E υ υ ) 0. Under he assumpion of 1, ) (,, ( 1,, = inveribiliy, he rades and quoe revisions may be expressed as a linear funcion of curren and pas innovaions, i.e. he vecor moving average (VMA) corresponding o he above VAR model: r x = υ 1, = c υ + a υ 1 1, 1 1 1, 1 + c υ + a υ 1, 1, + L + υ 0 + L+ b υ, 1, + d υ + b υ, 1 1, 1 + d υ + L, + L Then, he variance of efficien price innovaion σ w and he absolue (relaive) measure of w,x rade informaiveness σ ( R ) can be esimaed by: σ σ w bi Ω bi = 0 = 0 = w b i Ω bi + + ai = 0 = 0 = 1 w, x = 1 σ 1 Ownership srucure liquidiy, Page 6

7 Journal of Finance and Accounancy w, x w σ R w = σ In our esimaion, we adop a four-variable VAR model, i.e. he rade variable becomes a 0 1 column vecor of [ x x ] k x in his model. Assuming k x = q / q x is he signed rading volume we have x = sign( x ). For he quoe revision, we use r log( 1) insead of r = q q 1, where q is he quoe midpoin. We followed he Lee and Ready (1991) procedure o classify he rade as a purchase or a sale. Then he signed rade volume can be obained by muliplying he rade volume wih 1 (or +1) if he rade is a sale (or purchase). Following Hasbrouck (1991b), VAR is runcaed a lag 5 and VMA is runcaed a lag EMPIRICAL RESULTS 4.1. Descripions of sample firms wih spreads, dephs and rade informaiveness We divide our sample for insider ownership, insiuional ownership, and financial analyss following a firm ino five groups o invesigae he variaion of spreads, deph and rade informaiveness. Table 3 shows he resuls for each group. Panel A of Table 3 shows ha, excep for he smalles insider ownership group, all spread measures (such as dollar quoed spreads, percenage quoed spreads, dollar effecive spreads, and percenage effecive spreads) monoonically increase wih he percenage of insider ownership. These resuls are consisen wih Chiang and Venkaesh (1988) and Sarin e al. (000) who find ha higher insider ownership is associaed wih wider spreads and inconsisen wih Dennis and Weson (001) who documen ha insider ownership and spreads are negaively relaed. Following Lee e al. (1993) and Kavajecz (1999), we measure dephs by differen groups of insider ownership because he auhors find ha marke makers boh widen he spread and lower he deph a imes of high informaional asymmery. Panel A of Table 3 shows ha, he dephs monoonically decrease wih he percenage of insider ownership excep for he smalles insider ownership group. Therefore, boh spread and deph resuls are consisen wih Lee e al. (1993) and Kavajecz (1999), who found ha he marke makers increase heir spreads and decrease heir dephs when hey have a high probabiliy of rading wih informed raders. Our empirical model for rade informaiveness shows ha i increases wih he percenage of insider ownership. This resul implies ha here is higher informaional asymmery for higher insider ownership firms. These resuls are consisen wih Sarin e al. (000) and Dennis and Weson (001) who find a posiive relaionship beween adverse selecion coss and insider ownership. Chiang and Venkaesh (1988) show ha here is no relaionship beween spreads and insiuional ownership. Dennis and Weson (001) find ha he spread is negaively relaed o he percenage of insiuional ownership. However, Kohare and Laux (1995) and Sarin e al. (000) find ha here is a posiive relaionship beween spread and insiuional ownership, conrary o hese sudies. Therefore, here is no agreemen in he lieraure as o he direcion of he relaionship. Classify he rades ha occur in he middle of he spread using he ick es and oher rades as buys (sells) if hey are closer o he ask (bids). Ownership srucure liquidiy, Page 7

8 Journal of Finance and Accounancy In Panel B of Table 3, we presen our empirical resuls for he relaionship beween spreads and insiuional ownership. Like insider ownership, we equally divide he sample ino 5 groups by percenage of insiuional ownership. The Panel shows ha all spread measures decrease wih a higher percenage of insiuional ownership. Therefore, our resuls are consisen wih Dennis and Weson (001) who show a negaive relaionship beween spreads and insiuional ownership. However, we do no observe a clear paern for deph and rade informaiveness wih insiuional ownership. Sarin e al. (000) documens a negaive relaionship beween adverse selecion coss and insiuional ownership. However, Dennis and Weson (001) find ha here is a posiive relaionship beween adverse selecion coss and insiuional ownership. We will invesigae his issue wih regression in a laer secion. In addiion o he ownership, we invesigae he number of financial analyss following. Panel C of Table 3 shows ha all spread measures monoonically decrease wih he number of financial analyss. This resul indicaes ha he number of financial analyss is negaively correlaed wih spreads. This resul is inconsisen wih Chung e al. (1995), who find ha more financial analyss follow socks wih greaer bid-ask spreads. Our correlaion marix in Table shows ha more analyss follow larger firms, so our resuls for a negaive relaionship beween he number of financial analyss and spreads is expeced because spread is negaively correlaed wih he size of a firm. However, we do no find a clear relaionship beween financial analyss and rade informaiveness. 4.. Regression resuls To es wheher here is any saisical difference beween ownership or number of financial analyss following and spreads, deph or rade inforamiveness, we use regression analysis. We include price, reurn volailiy, average daily rading volume, and marke capializaion as conrol variables in he regression equaion o ascerain wheher here is a clear effec of he ownership or financial analyss on he spreads, dephs, and rade informaiveness. The empirical regression resuls are shown in Table Spreads and ownership or number of financial analyss following Panel A of Table 4 shows ha he coefficien for he insider ownership is posiive and saisically significan wih quoed and effecive spreads afer conrolling for price, volume, marke capializaion, and volailiy. This resul is consisen wih Chiang and Venkaesh (1988) and Sarin e al. (000). Before conrolling for he variables, our correlaion marix shows ha insider ownership and spreads are posiively correlaed. However, his resul is inconsisen wih Dennis and Weson (001) find ha he spreads have a saisically significan negaive relaionship wih insider ownership. Our resuls imply ha here is srong posiive relaionship beween insider ownership and spreads. In addiion, he coefficiens for insiuional ownership are negaive and saisically significan even afer conrolling for price, volume, marke capializaion, and volailiy. This resul shows ha insiuions prefer lower spread socks. This is consisen wih Dennis and Weson (001) who find ha he spread is negaively relaed o insiuional ownership and is inconsisen wih Kohare and Laux (1995) and Sarin e al. (000) who find posiive relaionships beween insiuional ownership and spreads. Ownership srucure liquidiy, Page 8

9 Journal of Finance and Accounancy The coefficiens for he number of financial analyss following in Panel A of Table 4 are negaive and saisically significan. This indicaes ha a sock wih a large number of financial analyss following shows beer liquidiy, which is inconsisen wih Chung e al. (1995) who find ha more financial analyss follow socks wih greaer bid-ask spreads Deph and ownership or number of financial analyss following In addiion, we invesigae he relaionship beween ownership or number of financial analyss following and dephs following he work of Lee e al. (1993) and Kavajecz (1999), who deermine ha marke makers decrease heir dephs when hey face a higher probabiliy of informed raders. The regression resuls are shown in Panel B of Table 4. The coefficien for insider ownership is negaive bu saisically insignifican afer conrolling for price, volume, marke cap, and volailiy. In addiion, he coefficien for insiuional ownership is negaive and significan. This indicaes ha insiuional invesors prefer lower deph socks. Bu, we do no find any significance for he coefficien of financial analyss following Trade informaiveness and ownership or number of financial analyss following Panel C of Table 4 repors he regression resuls for rading informaiveness and ownerships or number of financial analyss following. I shows ha he coefficiens for insider ownership and he insiuional ownership are posiive and saisically significan. These resuls imply ha here is a greaer endency oward informed rading for high insider and insiuional ownership socks. This is inconsisen wih Sarin e al. (000) and Easley e al. (1998) who find a negaive relaionship beween informaion asymmery and insiuional ownership. Bu our regression resul shows ha here is no significan relaionship beween he number of financial analyss following and rade informaiveness. 5. CONCLUSION In order o deermine wheher here are any relaionships beween informaion asymmery and ownership srucure or number of financial analyss following, we use percenage of shares owned by officers and direcors as a proxy for insider ownership, he percenage of insiuional ownership and he number of financial analyss following a firm. We find ha insider ownership is significanly posiively correlaed wih spreads afer conrolling for price, volume, marke capializaion, and volailiy. However, our regression resuls show insiuional ownership is negaively correlaed wih spreads and dephs. These resuls imply ha insiuions prefer lower spread and deph socks. The number of financial analyss following is significanly negaively correlaed wih spreads. This indicaes ha a sock wih a large number of financial analyss following shows beer liquidiy, In addiion, we invesigae he relaionship beween rade informaiveness and ownership srucure or number of financial analyss following. Our resuls indicae ha higher insider and insiuional ownership have a significan posiive relaionship wih rade informaiveness. Bu here is no such relaionship wih he number of financial analyss following. These resuls indicae ha here is more informed rading for socks wih higher insider and insiuional ownership. Ownership srucure liquidiy, Page 9

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