The main aim of this article is to examine the relation between institutional ownership and stock liquidity. Using a large sample of Indian firm data for the period 2001–2012, we estimate two liquidity measures, Amihud illiquidity and HL-spread. We find that institutional ownership is negatively related to the stock liquidity. We also find that the negative institutional ownership–stock liquidity relation is mostly driven by foreign institutional investors (FIIs) and Bank ownership. Conversely, retail ownership is positively related to the stock liquidity. Importantly, we find that institutional investors are more likely to hold liquid stocks. These findings are consistent with the hypothesis that the level of institutional ownership proxies for informed investors, while they trade liquid stock to reduce price impact cost.
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