Foreign ownership and liquidity: evidence from a frontier market

Purpose: This study aims to provide empirical evidence on the impact of foreign share ownership on the liquidity of the Tunisian Stock Exchange (TSE). Design/methodology/approach: The authors hypothesize in the first strand that stock liquidity could be positively affected by foreign ownership based on the real friction channel. The authors then hypothesize in the second strand, based on the information friction channel, that foreign ownership's impact on stock liquidity could be insignificant or negative and that foreign investors raise the level of information asymmetry. A sample of 318 firm-year observations from Tunisia over the 2012–2017 period and a random-effects estimation were used. Moreover, using the 2SLS estimator, a robustness check framework was applied in order to address any potential reverse causality concerns. Findings: The authors find strong evidence that higher foreign ownership improves stock liquidity. More specifically, firms with higher foreign ownership engender a lower bid-ask spread, a better stock ability to absorb a large amount of trading volume, and a larger depth. These findings are still valid when reverse causality concerns are addressed through the use of the 2SLS estimator. Originality/value: The paper contributes to the existing literature by focusing on the ownership–liquidity relationship on a frontier market. It provides further empirical support that higher corporate governance quality reduces the information asymmetry problem and enhances stock market liquidity.