LAUSR

With the recent deregulation, the National Equities Exchange and Quotations (NEEQ) has become the fastest growing exchange in China. Despite its phenomenal growth, the NEEQ has an urgent need to improve its liquidity, as 70 % of the stocks listed are never traded and more than half of the stocks have an average daily price swing over 10 %. We study factors that affect the liquidity of the NEEQ-listed firms and provide evidence that large information asymmetry decreases liquidity on the NEEQ. Specifically, we find that informed ownership and concentrated ownership both have significantly negative influence on a stock’s liquidity, while institutional ownership and leverage have no impact. In addition, market makers do not alleviate the information asymmetry of firms listed on the NEEQ. However their involvement does improve firms’ liquidity by providing more efficient price discovery. We conclude that the information asymmetry in firms contributes to the extreme lacking of liquidity on the NEEQ. To improve their liquidity, firms can adopt more diffused ownership and/or reduce the informed ownership while the exchange needs to improve its institutional settings such as enforcing the market making transaction to all firms and strengthening its information releasing requirement to enforce more frequent information releasing and better releasing quality.