State ownership and stock liquidity: Evidence from privatization

We provide unique firm-level evidence of the relation between state ownership and stock liquidity. Using a broad sample of newly privatized firms (NPFs) from 53 countries over the period 1994–2014, our study identifies a non-monotonic association between state ownership and stock liquidity. The inverse U-shaped relation is consistent with trade-offs between costs and benefits of state ownership and suggests an optimal level of government shareholdings that maximizes stock liquidity of NPFs. We further identify that the inflection point from the cost/benefit trade-off is contingent upon characteristics of the nation's institutional environment. •We study how state ownership affects stock liquidity.•We identify a non-monotonic relation between state ownership and stock liquidity.•This relation is consistent with trade-offs between costs/benefits of state ownership.•The inflection point from this trade-off depends on the institutional environment.