Stock market liquidity and firm performance

Article history: Received June 5, 2015 Received in revised format August 16 2015 Accepted November 23 2015 Available online November 23 2015 This paper investigates the relation between stock liquidity and firm performance. Liquidity plays an important role on performance of firms listed in Stock Exchange. When there is a good flow of trading stocks, people could expect more financing through absorbing investors on the market. This study examines the relationship between stock market liquidity and firm performance. The sample of the study was the continuously NSE listed top ten indices over the period 2005-2014. To check the relationship between stock market liquidity and firm performance, the ordinary least sequence and general linear models were applied on Gretl and SPSS, respectively. The results of this study showed positive relationship between independent variables, return and age on dependent variable Tobin’s Q. Further relationship between stock market liquidity and firm performance was also check and it was found that stock market liquidity was correlated with higher firm performance as measured by Tobin’s Q. Growing Science Ltd. All rights reserved. 5 © 201


INTRODUCTION
firm performance and valuation. Stock market is increase Stock market liquidity is an important to measure performance sensitivity. Firms with liquid stocks have market growth and efficiency. Stock markets are playing better firm performance as measured by the market-tocapital mobilization and provide secondary market to the book ratio. The relation between liquidity and investors. It is help to financial institutions buy sell and performance has received considerable attention in the securities. Stock market liquidity is Large markets that financial economics variety of perspectives. This are liquid and efficient can continue to receive the researcher has considered the effect of liquidity on required foreign investments to economic growth. A stock performance as well as the dependence of liquidity on firm market is the aggregation of buyers and sellers of stock performance. This study also does not evaluate any and shares. Stock market is place to trade shares in market evidence that liquidity improves firm performance through and include securities listed on a stock exchange as well block holder investors as the relation between liquidity on as those only traded privately. Participants in the stock firm performance. Firm performance is same for stocks exchange range from small individual stock market with high and low levels of outside block holdings as well composed the network of computers where trades are as for stocks with high and low levels of firms' holdings. made electronically by traders. Liquidity is a liquid asset Evaluation in situation of the market liquidity of the or security can be easily bought or sold with little or no firm's shares/stocks declines due to conceder ownership. impact on price. It is high level of trading activity allowing The performance value of the firm is expected to decrease. buying and selling of shares and stocks in minimum price The purpose of did study was to understand the basics of disturbance. Liquidity is corporation to short-term stock market and the effect of market liquidity on the firm obligations. Liquidity is measured with liquidity ratio it performance so as to enhance the overall growth of the means current ratio, quick ratio and case ratio. Liquidity is firm. the asset or process buying and selling the property in less time and cost possible in some time. The liquidity that Literature Review: In their seminal [1] work formally an exchange affords the investors enables their holders to developed the dividend irrelevance hypothesis. quickly and easily sell securities in any firms and In perfect capital markets populated by rational company. Market liquidity is a market's ability to facilitate investors, a firm's value is solely a function of the an asset being sold quickly without having reduced price.
firm's investment opportunities and is independent Liquidity market positively impacts the stock market.
of the firm's payout policy. One analysis regarding Conclude that stock market liquidity is the improved of that Market liquidity was the ease of trading of an firm performance and increase the efficiency though asset, was made [2]. It's risk was the potential loss, feedback effect. Stock market relation between liquidity on because a security can only be traded at high or firm performance because liquidity are positive impact on prohibitive costs.
in firm performance efficiency of manager pay-for-Different stock market researchers have shown Further other factors related to firm's liquidity were different results like [3] how the market liquidity effects of studied and it was found that innovative firms have firm performance and relation between stock liquidity and higher liquidity and take a variety of actions that help to firm performance. They assessed the effect of the market keep their stock more liquid [7]. A firm's ownership liquidity on firm performance as measured by a firm's structure influenced both its liquidity and value. They Tobin's Q ratio. Similarly one research [4] showed that found that the latent investment horizon explains liquidity is an important factor in capital asset pricing. differences in liquidity and firm value among firms listed Researchers have shown that expected asset returns on the Tokyo Stock Exchange. Empirical results indicated depend on their liquidity (or marketability) in addition to that the longer the investment horizon, the lower the their risk.
firm's liquidity and value [10]. One study for [5] the position of stock market A study showed that institutional participation in the liquidity at Karachi Stock Exchange (KSE) during the U.S. stock market had played an ever increasing role in period from 1985 to 2006 was done and researcher found explaining cross-sectional variation in stock market the evidence of less stock market liquidity at Karachi illiquidity. They showed that institutional participation in Stock Exchange during the sample period. They found equities markets had played an increasingly important role that less liquidity causes less synchronicity in prices in explaining cross-sectional variability in illiquidity [11]. attracting less inventors and results is low size of market.
A research found evidence that sensitivity of firm value They measured of liquidity in a stock exchange and to innovations in aggregate liquidity declines after results therefore were mostly on ratios concerning with dividend initiations [12]. Indeed, present significant GDP and Aggregate Market Capitalization as the evidence that the payout policy of the firm is related to denominators on the value of total share traded. Similarly the liquidity of its common stock [13]. One research [6] another researcher analyzed that the relationship analyzed that the Indian and the empirical results between performance and liquidity of shares listed on the indicated that Foreign Institutional Trading significantly Tehran Stock Exchange investigated. The results of influences market liquidity in a negative direction [14]. investigation showed that between the liquidity and performance scales a strong correlation was observed.
Objetives of the Study: After a test confirmed the hypothesis was found, there To find out market to book value ratio for the firms was a significant relationship between firm performance under study. and liquidity. In an study it was investigated the impacts To calculate Tobin's Q ratio for the firms under of a firm's stock liquidity on corporate governance and study. firm performance. Using a sample of REITs in US from To find out the market returns for the firms under 1992 to 2008, they found that stock illiquidity, has a study. significant negative impact on future firm performance To find out the different constructs of liquidity for [7].
the firms under study. Other researchers [8] also investigated the relation To find out the relationship between liquidity and between stock liquidity and firm performance by applying firm performance Gretl and SPSS. The results of this study showed positive relationship between independent variables, return and Research Methodology: The study was empirical on age on dependent variable Tobin's Q.
nature and secondary data was use to complete it All the In a study which examined the impact of stock market companies listed on any of the stock in India will form the liquidity on companies' economic Performance, the population. All the companies listed on NSE was act as statistical population included all firms in Tehran Stock sample frame. Individual company listed on nifty was the Exchange (TSE) from which 97 firms were sampled on a sample elements.35 companies listed continuously on ten year period from 2003 to 2012. They found that stock NIFTY for the study time period was form the sample liquidity has a significant positive impact on two criteria size.(study time period of 2005 to 2014). Non probability of firm performance, EVA and Tobin's Q while we find no judgmental sampling was used. Secondary resources was evidence that liquidity has any significant impact on ROA use for collecting the data on the variable study (like NSE [9]. india.com, moneycontrol.com)

Sample Selection and Variable Selection:
The data is the objectives of study, following tests were applied and collected from several databases. daily and result & discussion is as given below: monthly stock as well as index return data from nseindia website was collected firm financials Normality Tests: The normality tests all report a P value. data from individual company website and In this case, the null hypothesis is that all the values were annual report there off were collected. Similarly sampled from a population that follows a Gaussian financial data for ratios was collected through distribution.
daily returns were deleted from the sample and missing Liquidity Index, is used a measure for liquidity of the firm. In this paper, we follow Bekaert, Harvey and Lundblad (2005) to construct our main proxy for liquidity as a transformation of the proportion of zero daily firm firm's fiscal year. We then compute our liquidity proxy, liquidity, we rely on a proxy for Tobin's Q as our main firm's market value to the replacement cost of its assets) number of studies (see, 14, 21) Our proxy for Q is taken from Kaplan and Zingales [15]. through which liquidity affects firm performance. We first performance, or has no effect on performance. From the above table of results, it can be seen that data is almost normal. The data set can be further used for applying test for fulfilling objectives.
Curve Estimation: To find out the impact of stock market on firm performance, linear regression was applied. |A preliminary condition for regression is finding out which type of regression has to be applied. It can be found out through curve estimation. The results of curve estimation results are discussed in the table below. The above table results indicates that either cubic or quadratic type is the best fit. This suggests that linear regression can't be applied. In this case Generalized Linear model is the best test to check the relationship between dependent and independent variables.
Still OLS regression was applied to check the causal relationship between the variables as quadratic and cubic models are comparatively difficult to interpret and to check the extent of relationship.

Summary Statistics:
The Model Fit table provides fit statistics calculated across all of the models. It provides a concise summary of how well the models, with estimated parameters, fit the data. For each statistic, the table provides the mean, standard error (SE), minimum and maximum value across all models. It also contains percentile values that provide information on the distribution of the statistic across models. For each percentile that percentage of models has a value of the fit statistic below the stated value.  Ordinary Least Squares: To assess whether stock liquidity improves, harms, or has no effect on firm performance we regress a proxy for Tobin's Q on our liquidity measure and other variables. In statistics, ordinary least squares (OLS) or linear least squares is a method for estimating the unknown parameters in a linear regression model, with the goal of minimizing the differences between the observed responses in some arbitrary dataset.
We first estimate equation using pooled OLS and all years for which shareholder rights data is available.
Taking Tobin's q as dependent variable and others as independent variable, PLS regression was applied, the results were: Tobin's Q has significant positive relationship with index returns. Tobin's Q has significant negative relationship with age of the firm. These results support hypothesis since higher stock market liquidity is correlated with higher firm performance as measured by Q. The results appear economically significant as well.

Interpretation:
The intercept does not seem to be statistically significant (i.e. the population parameter is not different from zero at 10% level of significance), while the slope parameter (the coefficient of the area) is significant at even 1%. The R is also high (0.302891) signifying a positive relationship between the stock market and their firm performance 2 indicators.

Generalized Linear Models
Generalized Linear Models: The Generalized Linear Model (GLM) is a model which can be specified to include a wide range of different models.
The generalized linear model (GLM) was applied as it is a flexible generalization of ordinary linear regression that allows for response variables that have error distribution models other than a normal distribution.
The summary statistics of the dependent variable (Tobin's Q) and covariates can be seen in the table below. Interpretation: According to the SPSS output the Deviance for the log linear model for the number of companies due to performance of equals Deviance = 3.197E13, df=326(=n-2=n-(number of parameters in the model)). It is hard to judge this value, without knowing the distribution of the deviance. A better measure is Deviance/df=9.806E10, measures "close" to one indicate good model fit. Here the score is not close to one and can be interpreted as lack in model fit.

Continuous Variable Information
H0: the saturated model does not fits significantly better than the proposed model.
The P-value for a test of Ho, this model fits as well as the saturated model, equals P(x 2 > x2 0 ) < 0.005 (with x 2 0 =3.197E13, df = 326). We would therefore reject Ho and find that the saturated model fits significantly better than the proposed model.

Omnibus Test a
Likelihood Ratio Chi-Square Df Sig.
260.460 18 .000 Interpretation: Likelihood Ratio Chi-square (LRX) was developed more recently than the Pearson chi-square and is the second most frequently used Chi-square. It is directly related to log-linear analysis and logistic regression. The LRX has the important property that an LRX with more than one degree of freedom can be partialised into a number of smaller tables each with its own (smaller) LRX and (lower numbers of) degrees of freedom. The sum of the partial LRXs and associated partial degrees of freedom, as found in the smaller tables, equals the original LRX and original number of degrees of freedom. If the resulting chi-square value is significant, stick with the unconstrained model; if insignificant then the constraints can be justified. The likelihood ratio test statistic is x² =260.460with a p-value=.000 Hence, we have relatively strong evidence in favor of rejecting Ho. Researcher has to stick to unconstrained model.

Type III -------------------------------------------------------------------------------------------------------------------Source
Wald Chi-Square Df Sig.  Interpretation: The parameter estimates table summarizes the effect of each predictor. While interpretation the signs of the coefficients for covariates and relative values of the coefficients for factor levels can gives insights into the effects of the predictors in the model. For covariates, positive (negative) coefficients indicate positive (inverse) relationships between predictors and outcome. An increasing value of a covariate with a positive coefficient corresponds to an increasing rate of damage incidents. For factors, a factor level with a greater coefficient indicates greater impact on Tobin's Q. The sign of a coefficient for a factor level is dependent upon that factor level's effect relative to the reference category. One can make the following interpretations based on the parameter estimates: The highest coefficient is for variable LOGA (-91412.563) and the sign is negative. The lowest coefficient is for * MBV * LOGA (-39.611) hence, hypothesis are significant. Since > 0, this means the higher the total score the higher the probability a independent variable effecting dependent variable. The intercept means, that the probability for a stock to have attended an academic program having a total score of 0 equals (0) = F(367344.01) 0.018 hence, result are significance. The intercept means, that the probability for a stock to effect Tobin's Q equals (0) = F(-91412.563) 0.027 hence, result are not significance. The variables for which B value is statistically significant, contributes more towards Tobin's Q.In this study following variables contribute significantly return, market to book value, zrlog, index, log age.

DISCUSSION
of causality between variables. Based on the type of data The relation between liquidity and performance has the best test to check the relationship between dependent received considerable attention in financial economics and independent variables. from a variety of perspectives. Liquidity leads to the This results of the study documents that liquidity entry of informed investors who make prices more responds to changes in market values of return and age of informative to stakeholders. Many conceptual models the company. The result of this study showed positive predict a positive relation between stock liquidity and firm effect of independent variables of return and log age on performance. The theories provide agency-based, stock dependent variable Tobin's Q. Stock market liquidity is price feedback and valuation reasons for why liquidity correlated with higher firm performance as measured by positively impacts performance. A small number of Tobin's Q. The results are consistent with the theory studies also predict a negative relation between stock which depicts that changes in the supply of liquidity, liquidity and firm performance.
negative market returns decrease liquidity much more

CONCLUSION strongest for high volatility firms and during phases
This study examines the relationship between stock tightness. market liquidity and firm performance. The sample of the Dalvi and Baghi [6], Uno and Kamiyama [10], Vivian, study was the continuously NSE listed top ten indices Thomas and Tice [3] calculated stock market liquidity and from the time period of 2005-2014. To check the firm performance relationship using the same relationship of stock market liquidity and firm performance methodology and found that independent variables the ordinary least sequence and general linear model were return, market to book value, zrlog. index, log age result applied on Gretl and SPSS respectively. Also test of depends on the Tobin Q. normality and summary statistics were applied on Gretl. The dependent variable of the study was Tobin's Q and