Shareholder Disputes and Commonality in Liquidity: Evidence from the Equity Markets in China

This paper examines liquidity commonality is caused by correlation in institutional herding and shareholder disputes due to irrational investors over the period from 2007 to 2017 in China. Consistent with the fund liquidity hypothesis, we find that shareholders dispute is negatively associated with liquidity commonality and that this negative relationship is more pronounced in firms with more excess control rights and desirability of liquidity for governance. We conclude that it is important to consider not only control-ownership divergence, which has been shown to be a supply-side factors as institutional herding from foreign investors, but also liquidity commonality in information environment. The block holders can cause the liquidity when shareholder disputes are governed by block holders to intervene and sell their stake to exit by threaten, or disagreement trade against the mispricing. This work contributes to the growing literature by analyzing the impacts of controlled ownership divergency on commonality in liquidity as well as the impact of investor sentiment related to the information environment.