Analyst following, ownership structure, and stock liquidity: Indonesia study

The type II agency problem, which occurs between minority and majority shareholders, is a common issue faced by Indonesian companies because most of these companies are family owned and tend to have a pyramid-shaped ownership structure. Additionally, this structure can lead to the expropriation of the minority shareholder because the ultimate shareholders have greater control rights than cash flow rights, enabling them to make decisions that benefit them without harming their share of the company’s profits. Asymmetric information is inevitable; therefore, public information providers such as financial analysts are considered a signal that asymmetric information can be eliminated. Because a company’s public information can be accessed easier, liquidity can be increased. This study shows how a concentrated ownership structure or a pyramid ownership structure can affect the liquidity of a stock and, in particular, how expropriation risk can happen to minority shareholders. This study also examines how the number of analysts that follow a certain company can affect its liquidity. This study traces the ultimate shareholder of each sample company using data from the Ministry of Law. Liquidity is measured using the adjusted Amihud Illiquidity. The sample used consists of firms listed on the Indonesia Stock Exchange from 2010 to 2014. The results indicate that analyst following is positively related to liquidity, but that a larger firm size weakens the effect. However, ownership structure does not significantly affect liquidity because the information on ownership might not be disclosed transparently in Indonesia.