Stock Illiquidity and Firm Characteristics

Abstract

Main objective of the study is to analyze firm characteristics which affect stock illiquidity. The paper aims to give suggestions and policy implications to corporates and investors while dealing with investments in illiquid stocks. ANOVA, chi-square tests, correlation analysis, univariate and multiple regression models are employed on Amihud (2002) (Amihud, Y., (2002). Illiquidity and Stock Returns: Cross-Section and Time-Series Effects, Journal of Financial Markets 5, 31–56) illiquidity measure and various firm characteristics. Findings of this paper suggest that firms with illiquid stocks can be characterized with low promoter’s stakes, high leverage, poor financial health, small size and low/negative profitability. The findings of the paper will be of relevance to retail investors who are at the mercy of informed investors. The results portray basic characteristics that an investor should look into before investing in any stock. The study is of value to the investors who are grieved because of the adverse selections and information asymmetry. Moreover, the basic nature of illiquid firms has never been studied.