Stock liquidity and stock return: an asymmetric impact of institutional ownership approach

• DOI: https://doi.org/10.1108/CG-03-2021-0119
• Published date: 03 November 2021
• Date: 03 November 2021
• Pages: 781-797
• Subject Matter: Strategy,Corporate governance
• Author: Abbas Ali Daryaei,Yasin Fattahi

Stock liquidity and stock return: an

asymmetric impact of institutional

ownership approach

Abbas Ali Daryaei and Yasin Fattahi

Abstract

Purpose –This study is primarilyaimed at investigating the asymmetricimpact of institutional ownership

on the relationship betweenstock liquidity and stock return. It was conductedby testing the hypotheses

regardingefficient monitoring and adverseselection from Tehran Stock Exchange(TSE).

Design/methodology/approach –Using a panel smoothtransition regression model and selecting183

firms for the period from2009 to 2019 from TSE, this study examined the data to explore the asymmetric

impactof institutionalownership on the relationship betweenstock liquidity and stock return.

Findings –The results show a positive impact by institutional ownership on the relationship between

stock liquidity and stock return in the firstregime (threshold level 39%), whereas in the second regime,

there is a negativeimpact by institutional ownership on the relationshipbetween stock liquidity and stock

return. Furthermore, the firms were divided into two groups based on the market value. The first group

includes those with a market share less than the mean total market value of the sample. The second

group includes firms with a market share higher than the mean total market value of the sample (large

firms). The results illustrate that the threshold level is 32% and 44% for the first and second groups,

respectively.

Originality/value –The findings of thisstudy suggest that institutional ownershiptheories require closer

inquiry.

Keywords Stock return, Institutional ownership, Stock liquidity, Asymmetric impact

Paper type Research paper

1. Introduction

Liquidity is a fundamental matter in investment (Chiang and Zheng, 2015). Liquidity plays a

key role in assets evaluation, because investors are basically concerned about a suitable

market for their asset. In each financial market, there are many tools for investment

according to the expansion and depth of the market, and investors choose their proper

assets by considering the output and risk of the investment (Loukil et al.,2010;Liang and

Wei, 2012;Marozva, 2019). Expected return rate of each asset is a marker for the lost

output under equal risk circumstances determined by investigating that asset. An effective

factor effective on the risk of assets is their liquidity potential (Amihud and Mendelson,

1986). Higher risk of assets entails the expectation of more output by the investor. Here,

liquidity potential is a particularlyeffective factor (P

astor and Stambaugh, 2003;Vo and Bui,

2016). Despite the essential role of this factor in making decisions, its evaluation and

transformation into an objectiveand quantified factor have not had a long history.

A large number of studies have worked on the relation between liquidity and stock return

(Amihud and Mendelson, 1986; Jun et al.,2003;Chang et al.,2010; Gopalan et al., 2012;

Chiang and Zheng, 2015;Vo and Bui, 2016;Marozva, 2019). But fewer studies have

analyzed the effect of corporate predominance factor on the mentioned relation. Because

Abbas Ali Daryaei is based

at the Department of

Accounting, Imam

Khomeini International

University, Qazvin, Iran.

Yasin Fattahi is based at

the Imam Khomeini

International University,

Qazvin, Iran.

Received 27 March 2021

Revised 29 August 2021

Accepted 13 October 2021

DOI 10.1108/CG-03-2021-0119 VOL. 22 NO. 4 2022, pp. 781-797, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 781

liquidity is a standard for evaluating the investment market, the fact of bid and ask spread

mustn’t be ignored. Moreover,institutional shareholders are able to prevent these problems,

according to their abilities at discovering the share price, which leads to the enhancement

of the output of investment market. In this study,we tried to analyze the effect of institutional

shareholders on the relation between liquidity and stock return. There has been a large

body of evidence regarding the effect of institutional shareholders on share liquidity.

Mendelson and Tunca (2004) believe that institutional shareholders reduce uncertainty

about the real price of assets and torts through the deals and promotes investors’ interest

leading to the enhancement of assets liquidity in the market. However, Agarwal (2007)

worked on the effect of institutional shareholders on liquidity through adverse selection and

information efficiency. As a result, he discovered a nonlinear relation between institutional

shareholders and liquidity which shows a rise in liquidity and the level of institutional

predominance. He reiterated the fact that these findings can be justified based on

information efficiency.Also, Nevisi and Niker (2006) demonstrated that institutionalinvestors

have more motivations for supervisingmanagement and can, therefore, promote the market

performance. However, at higher levels of predominance, institutional investors may

convince the board of directors to make inefficient decision. In other words, share

ownership by institutional investors at lower stages of predominance has a positive relation

with corporation value, which is of course adapted with the efficient monitoring hypothesis

(El-Diftar et al., 2017;Melis and Nijhof, 2018;andVadasi et al., 2019). However, higher

share predominance has a negative effect on corporation performance. This finding is also

adapted with “Convergence of interesthypothesis” (Wang et al.,2019).

There is a gap in the literatureas to the extent of the expected effect on the relation between

liquidity and share output in the range of 0%–100% of institutional shareholders’

predominance. Although some studies have examined the effect of institutional

shareholders on liquidity and stock returns, they have not examined the nonlinear effect of

institutional shareholders (Sarin et al., 1996;Sias et al.,2006;Agarwal, 2007;Rhee and

Wang, 2009; Cao and Petrasek, 2014; Dang et al., 2018; Ali and Hashmi, 2018;Hunjra

et al.,2020

;Dyakov and Wipplinger, 2020;Chuang, 2020). Therefore, the purpose of this

study is to determine the percentage of institutional ownership regarding the level of

transfer of the positive (negative) impact of institutional shareholders on the relationship

between liquidity and stock returns on the Tehran Stock Exchange (TSE) using the panel

smooth transition regression model. In other words, the present study seeks to test the

competing hypotheses in the literature related to institutional shareholders in the TSE. The

results can be useful for management and other stakeholders.

Regarding Iranian capital market, the history of institutional investors in Iran goes back to

the years before the revolution of 1978. In addition, measures taken in recent years, such as

the passage of the Securities Market Law (adopted in December 2005) along with the

growing wave of privatization following the policies of Article 44 of the Constitution, in

addition to providing institutional investors and defining the legal and professional status of

investors. Institutionally,they have doubled the need for their growth and development.

Examples include the licensing of 15 mutual funds and efforts to establish other institutions.

However, it can be said that institutional investors in Iran are not comparable to institutional

investors in developed countries in terms of diversity and level of expertise. Therefore, in

this environment with weak corporate governance, the positive or negative role of

institutional shareholders can be evaluated better. In the Iranian economic environment,

institutional shareholders have played the role of government in the stock market (Rahmani

et al.,2010

;Mehrani et al.,2017;Mahdavi and Daryaei, 2017 and Nasir Zadeh et al.,2018).

Over the past decade, Iran’s successive conflicts with domestic and foreign political,

economic and social interests have initiated research on the country’s economic strength

and its resilience to sanctions. In fact, stock market participants are eager to know how the

escalation of political risks and uncertainty about the financial situation will have effects on

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