Effects of large shareholding on information asymmetry and stock liquidity

Prior studies, such as Claessens et al.'s [Claessens, S., Djankov, S., Fan, J., Lang, L., 2002. Disentangling the incentive and entrenchment effects of large shareholding. Journal of Finance 57, 2741-2771], suggest that deviation between ultimate control and ownership decreases firm value (due to the entrenchment effects of large shareholding). Using a sample of Canadian firms, we study the relation of ultimate control and ownership with an important dimension of stock liquidity - bid - ask spread. We find that stocks with greater deviations between ultimate control and ownership have a larger information asymmetry component of their bid-ask spread and wider bid-ask spread. Our results are consistent with the notion that the ultimate owners of these stocks may have selfish agendas. To increase the probability of the agendas being implemented, the firms may have poor information disclosure, resulting in poor stock liquidity. (c) 2006 Elsevier B.V. All rights reserved.