Bid-Ask Spreads and Institutional Ownership

Article

Abstract

This paper examines the relation between bid-ask spreads, measured both as effective and specialist-posted spreads, and institutional ownership. For the overall sample, spreads are negatively related to institutional ownership share. The paper suggests that this effect may be due to some institutions being restricted in their trading, which reduces bid-ask spreads. The paper shows that for certain types of institutions, namely banks and investment managers, the above relation reverses. The results are robust to the inclusion of other firm-specific variables such as size, leverage, and financial distress measures.

bid-ask spread institutional ownership specialist 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Amihud, Y. and H. Mendelson, “Asset Pricing and the Bid-Asked Spread.” Journal of Financial Economics 17, 223–249 (1986).Google Scholar
  2. Baltagi, B. H. and Q. Li, “A Transformation that will Circumvent the Problem of Autocorrelation in an Error Component Model.” Journal of Econometrics 48, 385–393 (1991).Google Scholar
  3. Bentson, G. and R. Hagerman, “Determinants of Bid-Asked Spreads in the Over-the-Counter Market.” Journal of Financial Economics 1, 353–364 (1974).Google Scholar
  4. Campbell, J. Y., A.W. Lo and C. MacKinlay, The Econometrics of Financial Markets, 1st edition. Princeton, New Jersey: Princeton University Press, 1997.Google Scholar
  5. Fama, E. F. and K. R. French, “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33, 3–56 (1993).Google Scholar
  6. George, T. J., G. Kaul and N. Nimelandran, “Estimation of the Bid-Asked Spread and its Components: A New Approach.” Review of Financial Studies 4, 623–656 (1991).Google Scholar
  7. Glosten, L. R. and P. R. Milgrom, “Bid, Ask and Transaction Prices in a Specialist Market with Heterogeneously Informed Traders.” Journal of Financial Economics 14, 71–100 (1985).Google Scholar
  8. Gompers, P. A. and A. Metrick, “How are Large Institutions Different from Other Investors? Why do these Differences Matter?” NBER Working Paper, 1998.Google Scholar
  9. Hasbrouck, J. and G. Sofianos, “The Trades of Market-makers: An Analysis of NYSE Specialists.” Journal of Finance 48, 1565–1593 (1993).Google Scholar
  10. Kavajecz, K. A. and E. R. Odders-White, “An Examination of Changes in Specialists' Posted Price Schedules.” Review of Financial Studies 14, 681–704 (2001).Google Scholar
  11. Madhavan, A. and G. Sofianos, “An Empirical Analysis of NYSE Specialist Trading.” Journal of Financial Economics 48, 189–210 (1998).Google Scholar
  12. O'Hara, M., Market Microstructure Theory, 1st edition. Malden, Massachussetts: Blackwell Publishers, 1995.Google Scholar
  13. Rao, R. and P. Wadhwa, “The Threat of Delisting, the Firm's Financial Condition, and Shareholder Wealth,” Working Paper, The University of Texas at Austin, 1994.Google Scholar
  14. Stoll, H. R., “The Pricing of Dealer Services: An Empirical Study of NASDAQ Stocks.” Journal of Finance 33, 1152–1173 (1978).Google Scholar
  15. Tinic, S. M. and R. West, “Competition and the Pricing of Dealer Services in the Over the Counter Stock Market.” Journal of Financial and Quantitative Analysis 7, 1707–1727 (1972).Google Scholar

Copyright information

© Kluwer Academic Publishers 2004

Authors and Affiliations

  1. 1.Barclays Global Investors andUniversity of South CarolinaColumbiaUSA

Personalised recommendations