Stock Liquidity And Firm Value

Liquidity is an important characteristic of capital market, and it largely affects the efficiency of allocating resources. However, stock liquidity has not been taken into account by financial experts. We find that there are a lot of discussions between stock liquidity and asset pricing, stock liquidity and the return of asset etc. Maximizing the value of corporation is the main target for companies, relevant studies between stock liquidity and corporate value will provide the management with a brand new sight of corporate governance. It will be tremendously helpful to enhance the efficiency of stock market if we grasp the true essence between stock liquidity and corporate governance.By using a sample of A-share listed companies from 2011 to 2013,and the model from Fang, this paper investigates the relation between stock liquidity and firm value, and explores a few possible mechanisms through which stock liquidity may affect firm performance. When choosing the measure of stock liquidity, we don’t use turnover as liquidity proxy that are frequently used by domestic researchers, instead, we use illiquidity proposed by Amihud as our main proxy of stock liquidity. The results show that there is a significantly positive relation between stock liquidity and firm value as measured by the firm market-to-book ratio. Our further studies show that feedback effect may take responsible for the positive relation between stock liquidity and firm value. Specifically, Liquidity increases the information content of market price, informative stock price consists of information that is unknown to the management. When managers make investment decisions, informative stock price help them make better decisions, which leads to better performance. Our study finds that sentiment effect and pay-for-performance sensitivity are not responsible for the positive relation between stock liquidity and firm value. Although managers may try their best maximizing corporate value by "extract" information in stock price, but we managerial compensation is not the reason. Contrary to our intuitions, overtrades caused by overconfidence is not a mechanism through which stock liquidity affect firm value, which means in the period of 2011 to 2013,investors in china proved to be rational and basically abide by the creed of value investment. In china, listed companies generally have highly centralized ownership structures, which is different from that in the US. It is wildly accepted that institutional investors serve as blockholders in US stock market. They may intervene in corporate governance through two different mechanisms, namely shareholders activism and exit threat. Institutional investors can overcome free-rider problems as well as reduce the opportunity cost of capital when stock liquidity increases, thus they are much eager to improve the performance of companies. This paper shows that institutional investors do affect firm values, but fails to take a further step.In robustness test, we choose ZR(Zero-return ratio) as our liquidity proxy in a new perspective from transaction cost. The significance of some coefficients change, our main results remain robust, because there are a lot of noises when we use ZR as liquidity proxy.Finally, according to the conclusions of the paper, we come up with several practical proposals from three perspectives, namely regulators, listed companies and investors. We believe that our proposals will be useful to the companies and capital market.