Free Float in the Polish Capital Market and Its Importance for Investors

Abstract

Theoretical background: Free float (hereinafter referred to as FF) refers to the ratio of shares held by small investors (less than 5%) to all shares in a company. FF investors are generally unrelated to each other or to ma-jor shareholders and they constantly review the company’s current stock market valuation and thus improve the stock market efficiency. This means that the higher the FF, the potentially higher liquidity and better valuation of the company’s shares. A low FF recalls the institution of protecting the rights of minority shareholders, calls into question the sense of maintaining a public company status, and raises the potential risk of incorrect valuation. The literature generally lacks studies referring to all these issues as well as FF statistics in Poland.

Purpose of the article: The purpose of the article is to sum up the term “free float”, analyze FF statistics on the Polish capital market, indicate the link between FF and market liquidity, identify potential risks associated with listed companies having low FF and to determine whether it makes sense for the strategic investor to maintain public company status with low FF.

Research methods: Theoretical analysis (including analysis of capital market laws) and statistical analysis.

Main findings: The research confirmed that the relationship between FF and stock market liquidity is positive, but only considering FF in nominal terms. On the Polish capital market, as the nominal level of FF increases, market capitalization and trading liquidity increase largely and the average market spread decreases slightly. The article also points out important risks associated with low FF conditioning low liquidity, such as the risk of stock manipulation and the risk of incorrect company valuation. Potential areas for changing the law on squeeze-out/sell out institutions due to the inadequacy of the FF percentage were also pointed out.