Market Liquidity, Private Information, and the Cost of Capital : Microstructure Studies on Family Firms in Japan

We investigate market liquidity, distribution of private information-based trades, and the cost of capital of publicly traded family firms in Japan. As to the estimation of information asymmetry and illiquidity, we use the private information flow (Adjusted PIN) and the symmetric order inflow shock (PSOS). We also estimate several conventional measures of market liquidity and illiquidity as used in microstructure studies. We find that PSOS is indeed a good measure of market illiquidity for our sample of family firms. Our overall findings are that family firms in Japan have a lower cost of debt, lower market liquidity, and higher information asymmetry. However, the inference on cost of equity is either inconclusive or it is lower for family firms. Accordingly, the WACC of family firms becomes higher than the one for non-family firms. Thus, we argue that more opaque disclosure is called for among Japanese family firms to increase market liquidity of traded stocks as well to reduce the probability of private information-based trade in stock trading. This is the first study to use Adjusted PIN and PSOS variables for family firm data in family business research and it is a new contribution to the literature