The Impact of Stock Liquidity on Returns under Asymmetric Information and Financial Constraints

Document Type : Research Paper

Authors

1 , Ph.D., Department of Finance, Electronic Branch, Islamic Azad University, Tehran, Iran; Lecture, Department of Finance, Science and Research Branch, Islamic Azad University, Tehran, Iran.

2 MSc. Student, Department of Finance, Electronic Branch, Islamic Azad University, Tehran, Iran.

10.22059/frj.2023.365763.1007514

Abstract

Objective
The main purpose of this research is to investigate the effect of stock liquidity on investment returns under financing restrictions and information efficiency in 111 companies listed on the Tehran Stock Exchange from 2014 to 2019. This study examines the effect of the liquidity of companies' shares under two conditions i.e., financial constraints and information asymmetry. The findings align with prior research, indicating a positive correlation between stock liquidity and current and future rates of capital accumulation, productivity, and economic growth.
 
Methods
Hypotheses were examined using the multiple regression and ordinary least squares (OLS) method. This study adopts an applied research classification, involving the exploration and analysis of various factors within the Tehran Stock Exchange to either confirm or reject hypotheses. The outcomes of this research carry relevance for the Tehran Stock Exchange, investment firms, and brokerage companies.
 
Results
The main findings of the research proved there is a significant relationship between stock liquidity and investment in companies; a higher liquidity level of shares corresponds to a more effective and profitable investment. Based on the type of model and variables, four hypotheses are discussed in this article, all of which have been confirmed. This research shows that there is a direct relationship between stock liquidity and investment efficiency for younger companies with higher information asymmetry and financial constraints. These results are consistent with the view that increased stock liquidity positively impacts enhancing the information content of stock prices. This, in turn, contributes to the enhancement of market feedback and transparency, enabling managers of newer companies facing information asymmetry and heightened financial constraints to be influenced towards making value-creating decisions.
 
Conclusion
The research findings indicate a significant and negative association between higher stock liquidity and the decrease in investments below the required level for young companies. Furthermore, a negative and statistically significant relationship is observed between higher stock liquidity and lower investment in companies characterized by information asymmetry and greater financial constraints. This study sought to examine the relationship between stock liquidity and investment efficiency of companies listed on the Tehran Stock Exchange. It also tried to investigate whether the effect of stock liquidity on the reduction of investment in companies with information asymmetry and financial constraints is more significant or not. The findings reveal that the impact of increased stock liquidity on the reduction of investment is more pronounced in companies facing information asymmetry and financial constraints. These results are obtained following a thorough examination, incorporating endogeneity tests and a range of measures assessing both stock liquidity and investment efficiency.
 
 

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 26, Issue 1
2024
Pages 105-129

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