In this paper，we investigate how institutional ownership，liquidity and their interaction term affect the information efficiency． Based on three different metrics，the study shows that increasing the proportion of institutional ownership and raising the level of liquidity will promote information efficiency． Further，by introducing the interaction-term of institutional ownership and liquidity into the regression model，we find an interesting phenomenon in the stock market of China: With the rise of the liquidity level，increase in institutional holding proportion will harm information efficiency in some ways． This is probably because along with high trading volume，the fact that institutional investors use private information to buy additional shares will be easily obtained by other investors． Their imitational behavior will reduce the private information reflected by price，thus weakening the efficiency of information．