Stock Liquidity and State Ownership – Evidence from the Banking Industry of Selected Asian Emerging Markets

Stock Liquidity and State Ownership

Are you ready to delve into the soulful world of stock liquidity and state ownership in the banking industry of Asian emerging markets? If you’re curious about how state ownership influences the trading activity and market efficiency of bank stocks in these markets, then stick around, ’cause we’re about to take a bluesy journey.

Stock liquidity, my friends, is the smoothness and swiftness with which investors can buy and sell stocks in the market. It’s a crucial factor for investors, impacting their transaction costs, returns, and risks. And don’t forget, firms also dance to the tune of stock liquidity, as it affects their cost of capital, valuation, and corporate governance.

Now, let’s talk ’bout state ownership. You’ll find it quite common in many large banks of Asian emerging markets, like China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan, and Thailand. State ownership can wield a mighty influence on the stock liquidity of firms, especially through trading activity.

So, how does state ownership sway stock liquidity in the banking industry of Asian emerging markets? What are the perks and pitfalls of state ownership for bank stocks’ liquidity? And what does it all mean for investors, policymakers, and other stakeholders? In this article, we’ll explore these questions and more, based on a recent study by Lee and Hooy (2023)¹.

The Research Methodology and Data: A Bluesy Investigation

The study by Lee and Hooy (2023) embarks on an expedition to uncover the impact of state ownership on stock liquidity in the banking industry of selected Asian emerging markets. Their journey involves a sample of 209 banks from nine countries: China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan, and Thailand. They navigate a period from 2009 to 2018, seeking the hidden truths.

To measure stock liquidity, Lee and Hooy employ two bluesy metrics: the turnover ratio and the Amihud illiquidity ratio. The turnover ratio gauges the ratio of trading volume to market capitalization, revealing how frequently a stock is traded in the market. On the other hand, the Amihud illiquidity ratio unveils how sensitive a stock price is to trading volume.

To dig deep into the mysteries of state ownership’s influence, the researchers rely on the GMM panel regression model. This model stays in tune with various factors that might influence stock liquidity, such as firm size, leverage, profitability, growth opportunities, dividend payout ratio, institutional ownership, and market conditions.

The Research Findings and Discussion: The Soulful Revelation

The study by Lee and Hooy (2023) uncovers a bluesy revelation: state ownership possesses a positive effect on stock liquidity in Asian emerging markets. Translation? Bank stocks with higher state ownership tend to boast a higher turnover ratio and a lower Amihud illiquidity ratio compared to their peers with lower state ownership.

So, what causes this positive effect? Lee and Hooy point out two reasons that are rockin’ the boat. First off, there’s the “information advantage.” Governments have a backstage pass to information about banks that other investors lack. This reduces information asymmetry and adverse selection problems in the market, making it a smoother groove. Second, there’s “market support.” Governments can act as market makers or stabilizers for bank stocks, increasing market demand and reducing price volatility. Now, that’s a real jam!

But hold on to your bluesy hats, ’cause there’s a twist. This positive effect starts to turn sour when state ownership exceeds a certain threshold. The study estimates this threshold to be around 40% for the turnover ratio and 50% for the Amihud illiquidity ratio. At this point, bank stocks with very high state ownership face lower turnover ratio and higher Amihud illiquidity ratio than their peers with moderate state ownership.

Now, what’s behind this negative turn? Lee and Hooy highlight two factors leading the blues: “agency problem” and “crowding out effect.” The “agency problem” stems from the fact that the government may have different objectives and interests than the shareholders of banks. This can lead to inefficient management, poor performance, and low transparency. As for the “crowding out effect,” it comes into play when the government reduces the availability and attractiveness of other sources of financing for banks. This could limit the growth potential and innovation of banks.

The Research Implications and Conclusion: Soulful Notes for All

The study by Lee and Hooy (2023) strikes some soulful chords for investors, policymakers, and other stakeholders alike. For investors, it’s a reminder that state ownership is a double-edged sword for bank stocks’ liquidity. On one hand, it can provide information advantage and market support, boosting liquidity. On the other hand, it can also create agency problems and crowding out effects, dampening liquidity. So, investors need to find that sweet spot of state ownership for optimal liquidity.

For policymakers, this study sings a tune of hope. State ownership can be a valuable tool to enhance stock liquidity in the banking industry of Asian emerging markets. However, policymakers need to handle this tool with care, avoiding overuse or abuse. The pros and cons of state ownership must be balanced carefully. Policymakers must also take into account the wider implications of state ownership on other aspects of bank stocks, such as performance, valuation, and governance.

And let’s not forget about the other soulful stakeholders, like regulators, managers, employees, and customers. This study reveals that state ownership carries significant effects on trading activity and market efficiency for bank stocks. It calls for constant monitoring and evaluation of the role and influence of state ownership. Communication and cooperation between the government, investors, and stakeholders are essential to ensure state ownership serves the best interests of all parties involved.

In conclusion, this article has given you a soulful summary and discussion of Lee and Hooy’s (2023) recent study on stock liquidity and state ownership in the banking industry of Asian emerging markets. The study unravels a non-linear, inverse U-shaped relationship between state ownership and stock liquidity. It shines a light on the reasons and implications of this relationship, painting a vivid picture of the bluesy dynamics at play. We hope this article has hit the right notes and provided you with a clear and comprehensive overview of this intriguing topic. If you’ve got any questions or want to share your thoughts, feel free to reach out. And as you venture on your investing journey, may your bluesy tunes be ever harmonious and profitable!