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Int. j. econ. manag. soc. sci., Vol(3), No (9), September, 2014. pp.

496-499

TI Journals

International Journal of Economy, Management and Social Sciences


www.tijournals.com

ISSN:
2306-7276

Copyright 2014. All rights reserved for TI Journals.

Economic Performance and Stock market liquidity: Evidence from


Iranian Listed Companies
Mehdi Arabsalehi
Assistant Professor of Accounting Department, University of Isfahan, Iran.

Mahdi Beedel *
Faculty of Administrative Sciences and Economics, Department of Accounting, University of Isfahan, Iran.

Ahmad Moradi
Faculty of Administrative Sciences and Economics, Department of Accounting, University of Isfahan, Iran.
*Corresponding author: mehdibeedel@yahoo.com

Keywords
Economic performance
Stock market liquidity
Economic value added
Tobins Q
Return on Assets

1.

Abstract
The aim of this study is to examine the impact of stock market liquidity on companies economic
performance. A large amount of research has been done on the issue in the countries in which the capital
market is a main source of finance for the firms. To measure the stock liquidity, Amihud illiquidity method,
a widely used metric in many areas of finance, has been used. Three different well-known measures of
performance namely Economic Value Added (EVA), Tobins Q and Return on Assets (ROA) ratio have also
been used to measure the economic performance of companies. The statiscal population includes all firms in
Tehran Stock Exchange (TSE) from which 97 firms were sampled implementing the systematic sampling
method. The study was carried out on a ten year period from 2003 to 2012. We find that stock liquidity has a
significant positive impact on two criteria of firm performance, EVA and Tobins Q while we find no
evidence that liquidity has any significant impact on ROA.

Introduction

The Stock liquidity is one of the most significant factors investors consider for investing in the stock exchange market. Firm with liquid stocks
can improve its stock price in formativeness and performance monitoring, provide more incentives for insiders to create value [14]. Relatively
high liquidity is considered to be an attractive characteristic of a stock. One possibility to increase the liquidity of a companys stock is to use
liquidity providers services, where a liquidity provider (LP) can be defined as a market maker providing a contractual improvement in liquidity.
Also, Liquidity is a key element for well-functioning stock markets as it has important repercussions for traders, trading venues (stock exchanges
or alternative trading systems) and listed firms. Moreover, also the stability of the financial system as whole benefits from liquidity [21].
Liquidity is also an argument in convincing firms to list on their exchange, as it is a determinant of their cost of capital and their decision about
the optimal capital structure.
There are strong theoretical reasons to suspect that market liquidity will positively affect firm performance [19], [2], [4], [23]. Because stock
shares are the currency which commands both cash flow and control rights, the tradability of this currency plays a central role in the governance,
valuation, and performance of firms [13]. Thus, the study of liquidity in the stock market has attracted much attention in empirical and
theoretical literature in recent years.
At a macroeconomic level, works such as Naes et al. (2011) and Kaul and Kayacetin (2009), show evidence at the aggregate and industry level,
of a positive relationship between liquidity and real variables such as GDP and investment [22]. In theoretical analyses, liquid markets have been
shown to permit non-block holders to intervene and become block holders [20], facilitate the formation of a toehold stake [19], promote more
efficient management compensation [17] and stimulate trade by informed investors, thereby improving investment decisions by making share
prices more informative [28].
Although there has been a growing interest in studying the relationship that may exist between stock market liquidity and the economic
performance of companies, in spite of fast growing of capital market in Iran, few studies have been done in this regard. Therefore, the present
study investigates the impacts of stock liquidity on economic performance of Iranian Listed Companies.
To achieve this goal, it is necessary to consider appropriate measures to evaluate the economic performance of companies. This criterion should
be devoid of traditional accounting measures disadvantages such as capability of manipulation, having a short-term view and dealing with firm
value [25]. In this study, three different well-known measures were considered to evaluate economic performance of companies that are:
Economic Value Added (EVA), Tobins Q and Return On Assets (ROA). These criteria have different advantages and many researchers have
used them in order to evaluate firms performance. The mentioned criteria will be explained and expanded in detail in the variable definition
section.

2.

Literature Review

Cheung et al. (2013) evaluate the impacts of a firms stock liquidity on corporate governance and firm performance using a sample of REITs in
US from 1992 to 2008. They find that stock illiquidity measured by Amihud illiquidity, effective spread, and percentage of zero volume days,
has a significant negative impact on future firm performance. Moreover, they find that stock liquidity enhances different corporate governance
mechanisms.
Blume and Keim (2012) examine the relation between illiquidity and two measures of institutional stock ownership the percentage of a stock
owned by institutions and the number of institutions that own the stock both in the cross section and through time. They find that the number

497

Economic Performance and Stock market liquidity: Evidence from Iranian Listed Companies
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

of institutions that own and trade a stock is more important than the percentage of institutional ownership in explaining the cross-sectional
variability of illiquidity. Their findings also indicate that the power of the number of institutional owners in explaining illiquidity is significantly
stronger in the second half of sample period.
Naes et al. (2011) shows evidence of a strong relationship between liquidity and real cycles, finding a positive relationship of liquidity with the
GDP growth and real investment. Similar works such as Kaul and Kayacetin (2009) and Beber et al. (2010) show evidence in the same direction.
Fang et al. (2009) focus on the relationship between liquidity and firm performance, finding that firms with greater liquidity have a better
performance measured as the market-to-book ratio of assets.
Brounen et al. (2009) find that the empirical link between liquidity and firm value is not as conclusive as has been documented. They conclude
that further investigation of the effect of liquidity on firm value is an important direction for future research.
Lipson and Mortal (2009) and Butler et al. (2005) study the relationship between liquidity and equity issuance decision, finding that firms with
greater liquidity have lower issuance costs, thus using more funding through the issue of shares. Thus, firms with higher liquidity tend to have
lower levels of leverage.
Edmans (2007) shows that liquidity, by facilitating informed trade, can lead managers to be less myopic.

3.

Methodology

3.1 Sample Selection


The statiscal population includes all firms in TSE during the period of (2003-2012) and the sample consists of 97 firms based on systematic
sampling method. These firms had the followings in common:
1. All insurance, banking and other financial intermediaries excluded from the sample.
2. All the firms were active in Tehran stock exchange in the course of study
3. All the firms fiscal year terminated on the same date.
4. All the firms financial statements and other useful information were available and accessible in the course of study.
3.2 Variable Construction
3.2.1 Liquidity
Liquidity and transaction costs are difficult to measure as they often require the availability of detailed microstructure data. Following the market
microstructure literature [16], we use Amihud (2002) illiquidity (also known as Amihud price impact) to measure depth of stock liquidity.
Amihuds illiquidity is a widely used metric in many areas of finance for measuring stock illiquidity, such as asset pricing [1], analyst
disagreement [27] and ownership concentration [26].
Goyenko et al. (2009) demonstrate that Amihuds illiquidity measure is the most reliable measure of price impact using daily data. This measure
is defined as follows:

(1)

Where Dit as the number of trading days for stock i in year t, Ridt is the daily return on stock i in year t and DVolidt is the daily dollar volume in
millions for stock i in year t.
3.2.1 Economic Performance
We measure firm performance using 3 different well-known criteria that are: Economic Value Added (EVA), Tobins Q and Return On Assets
(ROA).
3.2.1.1 Economic Value Added (EVA)
EVA is a way to measure the actual profitability of the company's operations. In calculating the economic value added, the emphasis is on the
effectiveness of management in a given year [8]. In order to calculate the economic value added (EVA), method of Brigham et al. (1996) is used
as follows:
EVA= NOPAT Capital charges
NOPAT = (Profit Before Taxes and Interests) (1- Tax rate)
Capital Charges = Total Operating Capital (WACC)
Total Operating Capital = Net Operating Working Capital + Net Fix Assets
In the above equations, EVA is firm's economic value added, NOPAT is Net Operating Profit after Tax and WACC is the weighted average of
capital cost.
3.2.1.2 Tobins Q
Tobins Q (q) ratio is defined as the market value of assets (the market value of equity + book value of assets book value of equity balance
sheet deferred taxes), divided by the book value of assets. It reflects firm investment opportunities and cash flow that represents part of the
financial constraints that the firm might present. This measure has been used as a measure of firm value in an enormous number of studies such
as Fang et al. (2009) and Yermack (1996).
3.2.1.2 Return On Assets (ROA)
The Return On Assets (ROA) percentage shows how a profitable a companys assets are in generating revenue. ROA can be computed as (2):
!" #$% &!
'(!)*+! , "* '--!"-

(2)

Mehdi Arabsalehi, Mahdi Beedel *, Ahmad Moradi

498

International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

The number will vary widely across different industries. Return on assets gives an indication of the capital intensity of the company, which will
depend on the industry; companies that require large initial investments will generally have lower return on assets.
3.2 Research Hypotheses
As it was mentioned, in the paper effort was made to examine the impact of stock market liquidity on economic performance of the companies
listed in Tehran Stock Exchange (TSE) taking into account three different economic performance criteria namely EVA, Tobins Q and ROA
ratio. To do so the following hypotheses were tested:
1. Liquidity has a positive impact on the Economic Value Added (EVA).
2. Liquidity has a positive impact on the Tobins Q.
3. Liquidity has a positive impact on Return On Assets (ROA).
3.3 Research Models
The hypothesis presented in the previous section will be tested in a panel of firms listed on Tehran Stock Exchanges (TSE) for the period 20032012. To assess whether stock liquidity improves, harms, or has no effect on firms economic performance, we present regression models to test
hypotheses discussed.
To test hypothesis 1, 2 and 3 we estimate the following regressions:
./

0,"

23

> ? @A B C0,"
0,"

23

560,"

23

560,"

27
560,"

80,"

29

27

27

: ;80,"

80,"
80,"

29

29

2<

8=0,"

: ;80,"
: ;80,"

2<

80,"

(3)

8=0,"

2<

8=0,"

80,"

(4)

80,"

(5)

Where EVAi,t, Tobins Qi,t and ROAi,t are the firms economic performance criteria as defined above. The key explanatory variable is stock
Liquidityi,t. As it was mentioned Log_amihud was used as the measure of liquidity. Control variables are similar to those used by Fang et al.
(2009) and Munoz (2011). They include firm age (log_age), firm size (log_size) and firm leverage (Log_lev).

4.

Results

This paper investigates the impact of stock liquidity on firm economic performance. In this section, we examine the impact of stock market
liquidity on firm economic performance through testing the research hypotheses.
Hypothesis 1: Liquidity has a positive impact on the Economic Value Added (EVA).
Table (1) contains the OLS regression estimates of equation (3). It reports the results of testing the impact of liquidity on Economic Value Added
(EVA) (hypothesis number 1).
Table 1. Pooled ordinary least squares (OLS) regression results of model 3
./

0,"

23

560."

27

'+! ,

29

2G

E0F! ,

H!(

80,"

Variables

Coefficient

t-Statistics

Prob

Adj R2

F-Statistics

Prob

Intercept
Liquidity
Log_Age
Log_Size
Log_Lev

-1/231
0/492
1/355
0/091
3/411

-1/172
8/303
2/981
1/359
1/990

0/182
0/000
0/042
1/359
1/990

0/529

20/228

0/000

As shown in equation (3), the central hypothesis is that the parameter 1 is positive and significant, reflecting that higher stock market liquidity
is correlated with higher firm performance as measured by EVA. The coefficient of liquidity, 1, is significant and positive. The results appear
economically significant as well. Thus, the first hypothesis of research is confirmed.
Hypothesis 2: Liquidity has a positive impact on the Tobins Q.
Table (2) contains the OLS regression estimates of equation (4). It reports the results of testing the impact of liquidity on Tobins Q (hypothesis
number 2).
Table 2. Pooled ordinary least squares (OLS) regression results of model 4
> ? @A B C0,"

23

560."

27

'+! ,

29

E0F! ,

2G
2

H!( ,

80,"

Variables

Coefficient

t-Statistics

Prob

Adj R

F-Statistics

Prob

Intercept
Liquidity
Log_Age
Log_Size
Log_Lev

-0/086
1/547
8/624
-1/430
6/891

-0/065
2/551
0/701
-2/217
2/302

0/947
0/016
0/481
0/027
0/022

0/358

15/064

0/000

499

Economic Performance and Stock market liquidity: Evidence from Iranian Listed Companies
International Journal of Economy, Management and Social Sciences Vol(3), No (9), September, 2014.

As shown in equation (4), the central hypothesis is that the parameter 1 is positive and significant, reflecting that higher stock market liquidity is
correlated with higher firm performance as measured by Tobins Q. The coefficient of liquidity, 1, is significant and positive. The results appear
economically significant as well. Thus, the second hypothesis of research is confirmed.
Hypothesis 3: Liquidity has a positive impact on the ROA ratio.
Table (3) contains the OLS regression estimates of equation (5). It reports the results of testing the impact of liquidity on Return On Assets
(ROA) ratio (hypothesis number 3).
Table 3. Pooled ordinary least squares (OLS) regression results of model 5
0,"

23

560."

27

'+! ,

29

E0F! ,

2G

H!( ,
2

80,"

Variables

Coefficient

t-Statistics

Prob

Adj R

F-Statistics

Prob

Intercept
Liquidity
Log_Age
Log_Size
Log_Lev

-0/021
0/067
0/202
-0/132
-4/111

-0/106
0/922
0/013
-2/093
-1/804

0/915
0/357
0/911
0/037
0/069

0/303

8/886

0/000

As shown in equation (5), the central hypothesis is that the parameter 1 is positive and significant, reflecting that higher stock market liquidity is
correlated with higher firm performance as measured by ROA ratio. The liquidity coefficient takes a P-value 0/357 suggesting that this variable
is not significantly different from zero. Thus, the third hypothesis of research is rejected.

5.

Conclusion and Discussion

There are strong theoretical reasons to suspect that market liquidity will positively affect firm performance. A firm with liquid stocks can
improve its stock price in formativeness and performance monitoring, provide more incentives for insiders to create value and enhance
shareholder intervention. Thus, in this study, efforts were made to evaluate the impact of stock market liquidity on the economic performance
using pooled data of 97 companies active in TSE. Amihud illiquidity (also known as Amihud price impact) is used to measure depth of stock
liquidity and 3 different well-known criteria namely Economic Value Added (EVA), Tobins Q and Return On Assets (ROA) is used to evaluate
firms economic performance. The results of testing the research hypotheses confirm that firms with liquid stocks have better economic
performance as measured by EVA and Tobins Q. But we find no evidence that liquidity has a positive impact on economic performance as
measured by ROA ratio.

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