In business, economics or investment, market liquidity is a markets feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the assets price. Using data for the us over the period 1947 to 2008, we document that measures of stock market liquidity contain leading information about the real economy, also after controlling for other asset price predictors. Stock market liquidity and firm value sciencedirect. In the cross section, owners of less more liquid common stock are more less likely to receive cash dividends. China abstract empirical evidence for the effect of stock liquidity on firm value is limited and mixed due to a. The effect of stock liquidity on firm value evidence. Stock market liquidity and firm dividend policy journal of. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquiditythe decimalization of stock tradingand show that the.
Eaton terry college of business, university of georgia, athens, ga 30602, usa november 30, 2015 abstract this paper provides new evidence on the e ects of secondary market liquidity on rm value. Empirical evidence on the effects of stock liquidity on firm value and corporate governance, particularly the underlying mechanisms, remains an understudied area. Our results suggest that higher firm value for more liquid stocks seems to stem from enhanced stock prices rather than from better operating performance. Money and liquidity in financial markets we argue that there is a connection between the interbank market for liquidity and the broader. Dividend policy, stock liquidity, tehran stock exchange. N2 this paper investigates the relation between stock liquidity and firm performance. The study documents that firms with liquid stocks have better performance as measured by the firm market tobook ratio.
The effect of stock liquidity on firm value evidence from. The study documents that firms with liquid stocks have better performance as measured by the firm markettobook ratio. An examination of money markets suggests that a decline in stock market liquidity leads to a rise in the demand for real money balances. This article explores what market liquidity is, how it is measured and how important it is to the average investor. This result is robust to the inclusion of industry or firm fixed effects, a control for. The effects of stock liquidity on firm value and corporate. In response to an impending international stock market collapse global exchanges were pulling down their shutters and suspending trade. In the crosssection, owners of less more liquid common stock are more less likely to receive cash dividends. The study shows that firms with liquid stocks have better performance as measured by the firm markettobook ratio.
In addition, concentrated ownerships by insider and crossholding shareholders can lead to inferior liquidity and firm value. Stock market liquidity and firm dividend policy article pdf available in journal of financial and quantitative analysis 4202. Thus, a high liquid ratio does not always prove a satisfactory liquidity position if the firm has slowpaying customers, and vice versa in the opposite case i. Finally, we show that sensitivity of firm value to aggregate liquidity declines after dividend initiations, suggesting that investors view stock market liquidity and dividends as substitutes. The study shows that firms with liquid stocks have better performance as measured by the firm market tobook ratio. We provide evidence of a link between firm dividend policy and stock market liquidity. The market values an additional dollar of cash at a premium and, as theory predicts, unused credit lines are significantly less valued than cash. Market liquidity risk as a risk indicator update18032010. Tice, sheri, stock market liquidity and firm value august 18, 2008. Market uncertainty, liquidity, and stock returns kee h. Just because you can close your purchase in a heartbeat doesnt mean its doing you any good by tim melvin, investorplace contributor jun. Using the switch to broker anonymity as an exogenous shock.
Jun uno and naoki kamiyama waseda university, graduate school of finance, accounting and law. This lowers market liquidity, leading to higher volatility. Liquidity and firm value in an emerging market the. This paper investigates the relation between stock liquidity and firm performance. We show that there is a negative relation between liquidity and firm value. Specially, we examine this relationship using a sample of firms listed on the ho chi minh city stock exchange for the period 20062014.
The results show that higher stock liquidity leads to higher firm value, and robustness tests support our conclusion. Empirical analysis proved that companies with more liquid shares, traded on more regular basis, had higher operating income which was increasing business value. We document a positive relation between stock liquidity and firm value. Datar low frequency and small trading volumes along with high fluctuations in prices is a characteristic feature of stock markets in india.
An empirical analysis of stock and bond market liquidity tarun chordia, asani sarkar, and avanidhar subrahmanyam federal reserve bank of new york staff reports, no. The primary purpose of this study is to examine the relation between stock liquidity and firm value. To our knowledge, the link between stock liquidity and the economic value of innovation, a key concern of corporate managers, market participants, and policymakers, is underexamined. It discusses relative merits of different measures that have been used for measurement of market liquidity viz. Evidence suggests an increase in the market value of liquidity during the recent financial crisis. G10, g14, g23, e52 abstract this paper explores liquidity movements in stock and treasury bond markets over a period of more than 1800 trading days. Hassan ghodrati, seyed reza ghazi fini, naser azad, amir hassanjani roshan. Iv, we examine the dynamic interaction between stock market liquidity and the macroeconomy using vector autoregressions vars. We used of amivest, turnover, gopalan and flow measures for shares liquidity. Furthermore, historic liquidity is an important determinant of dividend initiations and omissions. If the market liquidity of a firms shares declines due to concentrated ownership, the firms value is expected to decrease. However, liquidity might also affect firm value by changing the discount rate. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two stage least squares, and the use of alternative measures of liquidity.
An interesting question that arises is whether 2 variables are related, in the full sense of the word, is whether and how the development of stock markets can translate into firm value. Evidence from tehran stock exchange pages 18491858 download pdf. Vietnam stock market during financial crisis using a data set ranging from 2006 to 2010. Sharemarket liquidity refers to the ease by which shares can be traded, and there are two essential features in defining the word ease. Then these concepts are applied to appraising the character of the market for a stock and the character of the different markets in which stocks trade. Pdf stock market liquidity and firm dividend policy. Variables and data we use tobins q as our measure of firm value, which is calculated as qi. This paper investigates the link between stock market liquidity and firm value in an important emerging market, vietnam. Stock market liquidity and firm value indian evidences. Measuring and predicting liquidity in the stock market. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using twostage least squares, and the use of alternative measures of liquidity.
Traders with different decisions over the underlying. Coffee 1991 and bhide 1993 note that though liquidity is a lubricant for. The purpose of this chapter is to show that market liquidity has a positive impact on the performance and operating profitability of the companies and thereby on the value of the companies. An empirical investigation of liquidity and stock returns. Based on the links between funding and market liquidity, we provide a uni. The existing literature on the relationship between stock market liquidity and firm value is far less contentious. Stock market liquidity is in fact a very good \leading indicator of the real economy. This research is supported by the financial service and innovation management research project, sponsored by the ministry of. Ownership structure, liquidity, monitoring, corporate governance, market microstructure. Stock market liquidity and firm dividend policy suman banerjee, vladimir a.
We investigate the relation between stock market liquidity and firm value and find that firms with more liquid stocks have higher value. The term describing this feature is market liquidity. An empirical analysis of stock and bond market liquidity. Sep 21, 2010 we examine the relation between firm value and liquidity among reits. Spindt abstract we provide evidence of a link between firm dividend policy and stock market liquidity. Depth, breadth, and resiliency these three attributes depth, breadth, and resil. Liquidity play an important role on values of firms listed in stock exchange. And finally, the positive liquidity shocks have stronger effects than the negative shocks, both in statistical significance and in magnitude, when explaining future momentum and value investment returns. The effect of stock liquidity on firm valueevidence from iraqi stock. We examine the relation between firm value and liquidity among reits. An empirical examination of the australian market we investigate the relation between stock market. In studying the association between firm performance and stock market liquidity, a proxy for tobins q, based on kaplan and zingales 1997, is used as the main measure of firm performance. An interesting question that arises is whether 2 variables are related, in the full sense of the word, is whether and how the. Gana and chemli 2008 find that stock liquidity decreases with the level of information disclosure.
Liquidity is nothing but an easiness to buy and sell the underlying and its derivatives at desired price. We conclude that stock liquidity improves firm performance through a feedback effect where liquidity stimulates the entry. Stock market liquidity and the cost of issuing equity. In this study, we examined the relationship between the dividend policy and shares liquidity under different criteria on 80 selected firms listed on tehran stock exchange over the period 20072011.
Using a large sample of seasoned equity offerings, we find that, ceteris. Evidence from the mena region article pdf available in international journal of business governance and ethics 72. Investors were selling their foreign assets and bringing capital back behind domestic borders. Stock market liquidity and firm value stock market liquidity and firm value fang, vivian w noe, thomas h tice, sheri 20091001 00. On the basis of standard asset pricing models, empirical research has put forth that lower liquidity results in higher required rate of returns which will act as a compensation for bearing the illiquid risk by the investors. Oct 01, 2009 stock market liquidity and firm value the study shows that firms with liquid stocks have better performance as measured by the firm market tobook ratio. In business, economics or investment, market liquidity is a market s feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the assets price. Stock market liquidity and firm value request pdf researchgate.
Tobins q the ratio of the firms market value to the replacement cost of its assets has been used as a measure of firm value in an enormous number of studies see, e. Chunga and chairat chuwonganantb a state university of new york suny at buffalo, buffalo, ny 14260, usa b kansas state university, manhattan, ks 66506, usa corresponding author. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using twostage least squares, and the use of. The market liquidity risk is an important part in measuring risk, since when incorporated it can add significantly to the loss value of asset at the tail incidents. Stock market liquidity and firm value vivian fangs website. Stock market liquidity and firm value wiley online library. Datar the paper focuses on stock market liquidity and its measurement. Further, under certain conditions, low future market liquidity increases the risk of. Although stock liquidity is commonly studied as an outcome of investors trading activities in the financial markets, its economic effects on firm value. When the market is still shallow and has problems of asymmetric information, market liquidity becomes very important.
We examine the mechanism through which stock market liquidity enhances firm value by dividing firm value, as measured by tobins q, into three components, namely, operating income to price, leverage, and operating income to assets. Liquidity is about how big the tradeoff is between the speed of the sale and the price it can be sold for. Illiquidity can result from increased asymmetric information. A wellknown characteristic of closedend funds is that their stock price is often different from their net asset value, suggesting that markets are inefficient. In the cross section, owners of less more liquid common stock are more less likely to. Jacobs professor of finance, department of finance, school of management, state university of new york suny at buffalo, buffalo, ny. Stock market liquidity and firm dividend policy by suman.
The effect of market liquidity on the company value. If the marginal investor values liquidity as in holmstrom and. Results show shareholders benefit from both cash and unused credit line capacity. Stock market liquidity and the cost of issuing equity alexander w.
Weston abstract we show that stock market liquidity is an important determinant of the cost of raising external capital. Employing a rich and detailed dataset of characteristics of firm listed in ho chi minh city stock exchange, the results from the analysis indicate that liquidity positively. Tightness in the interbank market for liquidity leads banks to engage in what we term liquidity. Nifty, banknifty, sbi, bhel, tata motors, icici bank, infosys, reliance infra, reliance communication, tcs etc. Stock market liquidity and firm performance semantic scholar.
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