Institutional ownership, information and liquidity

We examine relations between institutional ownership and quoted bid-ask spreads in general, and the adverse-selection component of the spread in particular. For our sample of Nasdaq stocks, we find that high institutional ownership leads to narrower spreads and spreads with a smaller proportion attributable to asymmetric information. Our results are not attributable to institutions' preferences for liquid securities. The relation between spreads and institutional ownership varies significantly across institutional type and is related to the largest block size held by an institution. Our evidence suggests that increases in institutional ownership reduce the costs of liquidity services by ameliorating informational asymmetries.