Corporate governance, institutional ownership, and stock liquidity of SMEs: evidence from China

ABSTRACT

This study explores the relationship between corporate governance and stock liquidity of Chinese small and medium-sized enterprises (SMEs). Our findings reveal a nonlinear (U-shaped) relationship between the overall quality of corporate governance and stock liquidity, implying that, unlike large-sized listed firms, SMEs cannot monotonically increase liquidity through improved corporate governance. After examining the sub-indicators individually, we find that the percentage of institutional shareholdings is the main driver of this U-shaped relationship. The nonlinear relationship between institutional shareholdings and stock liquidity suggests that continuously enhancing corporate governance may reduce stock liquidity, posing challenges for SMEs in securing financing.

KEYWORDS:

• Stock liquidity
• SMEs
• corporate governance
• institutional ownership

List of abbreviations

Abbreviations	=	Full Name
EMH	=	Efficient Market Hypothesis
GDP	=	Gross Domestic Product
GEM	=	Shenzhen Growth Enterprises Market
GMM	=	System generalized method-of-moments
NYSE	=	New York Stock Exchange
OLS	=	Pooled Ordinary Least Squares
SHSE	=	Shanghai Stock Exchange
SMEs	=	Small and Medium-sized Enterprises
SZSE	=	Shenzhen Stock Exchange

Acknowledgments

We are indebted to one anonymous referee of the journal for the constructive comments that have improved the manuscript significantly. This research is supported by the scholarship from China Scholarship Council (CSC) under Grant 202109210019.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The statistics are retrieved from Statista, Published by C. Textor, Mar 11, 2021, at: https://www.statista.com/statistics/783899/china-number-of-small-to-medium-size-enterprises/.

2. Eugene F Fama introduced the Efficient Markets Hypothesis (EMH) in (1970), asserting that markets efficiently incorporate all relevant information about asset intrinsic values promptly and accurately. EMH comprises three forms: weak form efficiency, semi-strong form efficiency, and strong form efficiency.

3. PAIDDIR, ASUC, HBSHARE in Tang and Wang (2011) denote (1) the number of paid outside directors divided by the total number of board of directors. (2) If the successor had previously acted as a director, supervisor, or executive for the controlling shareholder and was selected by the controlling shareholder,0, otherwise,1. (3) If a firm has either H or B shares, 1; otherwise, 0.

4. A shares or RMB ordinary shares are issued by firms incorporated in China, listed in China, and denominated in RMB. B-shares are RMB special stock. It is a foreign stock with a nominal value in RMB, subscribed and traded in foreign currency, and listed and traded on the stock exchanges in China. H-shares, also known as state-owned enterprise shares, refer to stocks of Chinese firms registered in the Mainland and listed in Hong Kong.