Firm Liquidity Research Articles

Idiosyncratic factors that shape shareholder reward policies in capital intensive companies

This study empirically explores multiple company-specific determinants of dividend distributions and stock buybacks, by utilizing a panel dataset of maritime shipping companies and a panel dataset of matched companies from various industries, as well as by employing Generalized Method of Moments instrumenting for endogeneity. The results provide evidence that idiosyncratic factors, such as the reputation of dividend distribution, firm market value, free cash flow, firm profitability, analyst’s coverage, free float, firm size, leverage, firm liquidity, stock liquidity, collateralizable firm assets, risk, investment opportunities, institutional ownership, and firm performance, are important antecedents of dividend distributions in both capital intensive and diverse industries. Moreover, the reputation of stock buybacks, firm market value, free cash flow, analyst’s coverage, free float, firm size, leverage, firm liquidity, stock liquidity, collateralizable firm assets, risk, institutional ownership, and firm performance, are important determinants of stock buybacks in capital intensive industries. Lastly, the reputation of stock buybacks, firm profitability, analyst’s coverage, free float, firm size, leverage, stock liquidity, collateralizable firm assets, risk, investment opportunities, institutional ownership, and firm performance are important factors of stock buybacks in diverse industries. These empirical findings enrich the literature and yield practical implications for principal officers and investors as discussed herein.

Optimizing performance through sustainability: the mediating influence of firm liquidity on ESG efficacy in African enterprises

Optimizing performance through sustainability: the mediating influence of firm liquidity on ESG efficacy in African enterprises

Pengaruh Likuiditas, Leverage, dan Ukuran Perusahaan Terhadap Profitabilitas pada Perusahaan Tekstil dan Garmen yang Terdaftar di BEI Periode 2019-2022

The “purpose of this study is to identify the relationship between profitability and the variables of liquidity, leverage, and firm size. Information for this study came from textile and garment businesses that were listed on the Indonesia Stock Exchange between 2019 and 2022. The purposive sampling technique was used to do the sampling. The following tests are employed for data analysis: Multiple Regression Analysis, Hypothesis Testing, Descriptive Statistics, and Classical Assumption Test. This study's findings demonstrate that ROA is significantly impacted by liquidity (CR), leverage (DER), and firm size (LnTA) all at once. Profitability (ROA) is positively impacted by liquidity (CR) and leverage (DER) in textile and garment firms listed on the Indonesia Stock Exchange (BEI) in 2019-2020, while company size (LnTA) has no effect on” ROA. Keywords: Profitability, Liquidity, Leverage, and Company Size

On the EPA's Radar: The Role of Financial Reports in Environmental Regulatory Oversight

ABSTRACTThis paper investigates the role of corporate financial reports in the Environmental Protection Agency's (EPA) regulatory activities. By tracking the EPA's direct retrieval of SEC filings, we identify three key findings. First, the EPA retrieves a large volume of financial reports, especially from firms in high‐pollution industries. Second, the EPA is more likely to access financial reports during enforcement investigations and significant rule proposals, but less so during compliance monitoring, with patterns varying predictably across firms. Third, the EPA's reliance on financial reports is potentially driven by its demand for information on firm liquidity, solvency, and profitability. Overall, our study highlights the usefulness of financial reports for the EPA as an environmental regulator.

Firm Value Model in Pharmaceutical Companies

This study intends to investigate and fill the knowledge vacuum among academics about the issue wherein leverage is not given priority as a risk factor in relation to institutional ownership and the availability of firm liquidity. Furthermore, investors in the capital market do not perceive leverage to be a major factor. This study uses a quantitative methodology, focusing on chemical businesses listed on the Indonesia Stock Exchange (IDX) over a ten-year period. It does this by using a multiple regression analysis method using panel data. Five companies were chosen through the use of a purposive sampling strategy. Through the use of leverage as an intervening variable, the study aims to maximize Firm Value. Two research models are combined into one, with each passing through different phases of testing for model selection, such as the Lagrange Multiplier, Hausman, and Chow tests. The results of the first model show that while liquidity affects leverage, ownership structure has no effect on it. In the second model, liquidity successfully explains the relationship between ownership structure and firm value. Furthermore, the impact on firm value is not mediated by leverage as an intervening variable. It is expected that these results will function as a roadmap for publicly traded corporations seeking to increase their Firm Value

Integration of green finance with ESG compliance to enhance the firm value. Managerial approach to determining the level of liquidity

The purpose of this study is to reveal the integration of green finance with environmental, social, and governance (ESG) compliance in firm liquidity. We also explore the non-financial channels like social capital and green innovation through which ESG compliance influences the firm’s liquidity. The study employs two-stage Least Squares (2SLS) and Generalized Method of Movements (GMM) regression analysis to address the endogeneity issues. The results obtained through 2SLS and GMM regression analysis indicate that firms engagement in green finance and ESG compliance help them keep their liquidity low. The findings indicate that firms operating in high-ESG regions have lower liquidity than firms operating in low-ESG regions. Green finance plays an essential role in designing the firm’s long-term strategy to promote sustainable development and address climate change. Green finance helps mobilize funds for sustainable environmental projects and reduces the risk of green investment. It may also improve the firm’s performance and reduce financial constraints. The government should introduce the clear legislation, incentives, and standards to promote the green finance for sustainable investment. The private sector can implement the green finance practices by integrating ESG disclosures with firm investment decisions, and innovation processes. This research study contributes to the existing corporate literature by analyzing the integration of ESG disclosures with green finance in the presence of social capital and green innovation in firm liquidity.

The effect of geopolitical uncertainty on stock liquidity: evidence from Taiwan misfired missile event

ABSTRACT We investigate the effect of geopolitical uncertainty on stock liquidity by using the Taiwan misfired missile event as a natural experiment. This exogenous event provides us with a unique opportunity to overcome the challenges of time recognition and confounding economic effects in the identification. We find that geopolitical uncertainty has a significantly negative effect on the stock liquidity of Taiwan-related firms. The mechanism test shows that the increased stock price risk and information asymmetry are the two main channels through which geopolitical uncertainty decreases stock liquidity. Moreover, we find that firms’ higher information transparency and regulators’ timely information disclosure on geopolitical events can effectively mitigate the negative impact of geopolitical uncertainty on stock liquidity.

Risk Management with Variable Capital Utilization and Time-Varying Collateral Capacity

We build a risk management model that incorporates variable capital utilization and time-varying collateral capacity. The former lets firms optimally choose capital utilization, and hence production, which affects capital depreciation and risk exposure. The latter means firms’ ability to borrow and hedge increases with expected earnings and thus utilization. Calibrated solutions show both ingredients matter for firm value. We test the novel model predictions using a new data set of oil and gas producers. Consistent with model predictions, we find utilization is negatively correlated with firm liquidity, while hedging is positively correlated with liquidity and expected profitability. This paper was accepted by Lukas Schmid, finance. Funding: Lu and Vij acknowledge financial support from the Terry-Sanford Research Award, University of Georgia. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2022.00415 .

Carbon emissions and liquidity management

Do higher carbon-emitting firms increase liquidity out of reluctance to invest in an era of rapidly changing climate policy concerns? Are rapidly escalating climate concerns placing higher carbon-emitting firms in a position where they are liquidity stressed? Liquidity management has long informed scholarly research in corporate finance. However, despite nearly universal interest in environmental aspects of finance, the intersection of liquidity and emissions management remains thinly studied. To address this gap, we analyze data of non-financial firms' carbon emissions and liquidity management for 2014–2021, using a robust methodological approach involving static and dynamic analysis with robust standard errors, GMM, and 2SLS regressions. For robustness, we incorporate an instrumental variable based on local mortality rates attributable to air pollution. Results show a strong negative relationship between firm-level emissions and firm liquidity, as reflected by net working capital ratios. Results are consistent with emissions-generating firms being either confident to expend liquidity even in an era of changing climate policy risks or, more plausibly, being stressed to preserve liquidity.

The UK financial firms’ textual risk disclosure and market liquidity

The informativeness of textual risk disclosure (TRD) of financial firms is unexplored in the extant literature. Employing a sample of UK FTSE all-share financial firms, this paper fills this gap in the literature by providing the first empirical evidence on the relationship between TRD and market liquidity. Consistent with the convergence argument for TRD, we find that TRD decreases the financial firms’ market liquidity. However, consistent with the divergence argument for TRD, our further analysis shows that TRD increases the market liquidity of large financial firms. Overall, our results suggest that financial firms’ TRD is informative to market participants. In addition to the practical and policy implications of our results, this paper opens avenues for future research to use our textual method to measure the determinants and use risk information of financial firms in different contexts.

Does Capital Structure Affect Profitability of Listed Ghanaian Firms?

ABSTRACT: Capital structure is one of the crucial decisions managers must make that can affect a firm's short-term and long-term value maximization prospects. Though extant studies have shown capital structure significantly affects profits, researchers have struggled to find an optimal mix of capital structure ideal for value maximization due to the influence of macro and micro factors. There is therefore the need for this to be properly studied contextually. Building on the Pecking Order Theory, this study examines the capital structure effects on profitability from a short-term, long-term, and total debt financing perspective on listed Ghanaian firms between 2003 and 2013. An unbalanced panel data of 23 listed manufacturing and service firms that are listed on the Ghanaian Stock Exchange are subjected to robust maximum likelihood heteroskedastic linear estimation models. Three main regressions that are run explain the short-term debt, long-term debt and total debt effect on firm profitability. The results show that short-term debt exhibits a positive effect on return on equity (ROE), whilst the relationship reverses for long-term debt, indicating that short-term financing was beneficial to firms rather than long-term financing. Also, total debt exhibited a negative and non-significant effect on return on equity. The author also found that firm liquidity exhibited a more pronounced positive effect on profitability for firms with short-term debt than long-term debt. Financial risk negatively affected the returns of only firms with short-term debt. Market share had a pronounced positive effect on ROE across firms whilst firm age exhibited a less pronounced positive effect on firm profits. Firm size and growth had increasing profit effects but was not significant in the dataset. Financial risk also negatively affected profits, but this was only significant in firms with short-term debt structures. This study finds that managers need to adopt more short-term debt financing rather than long-term financing as the former leads to more profits. There is a need for policymakers to develop long-term debt financing structures to compete in the Ghanaian debt market. It is also recommended that managers exercise due care when supplementing equity capital with debt.

Liquid stock as an acquisition currency

We examine how stock liquidity affects acquisitions. We hypothesize that liquidity enhances acquirer stock as an acquisition currency, especially when the target is relatively less liquid. As hypothesized, we find that more liquid firms have a greater likelihood of making stock acquisitions. Further, the difference in stock liquidity between acquirer and target firms increases payment with stock, reduces acquisition premiums, and improves acquirer announcement returns in equity deals. Consequently, firms take steps to improve stock liquidity prior to stock acquisitions. We use policy initiatives as exogenous shocks to firm liquidity to show that liquidity effects on acquisitions are plausibly causal.

Firm productivity in the Energy-electricity sector over the last two decades with crisis: The role of cross-listing

Novel to the literature, this study examines how cross-listing impacts firms’ productivity in Energy sector. Annual data of firm cross-listing over the last two decades with crisis (2002-2022) is employed for our analyses. We find evidence of significant drop in productivity after Energy firms (including electricity firms) cross-list in the US market. Meanwhile, we do not find strong evidence of significant decreases in firm productivity from other sectors in our sample. We note one possible explanation for this finding is that after cross-listing, Energy firms appear to utilize their increased capital to heavily invest in infrastructure, equipment, and plants for expansion, which might eventually damage their productivity. To seek for more thorough explanations for such decreases in Energy firms' productivity after cross-listing, we identify the determinants of firm productivity in Energy sector. Our results provide strong evidence that the increases in capital expenditures after Energy firms cross-list appear to be associated with the decreases in firm productivity. Notably, we note that negative impacts of capital expenditures (after cross-listing) and state ownership on firm productivity become much stronger and more statistically significant in developed countries than in emerging countries. Last, corporate governance and firm liquidity are found to be two determinants that help improve firm productivity in both electricity firms and other energy firms.

Exploring investor attention in Shariah markets, macroeconomic influences, and corporate performance: Insights from Indonesia

This study examines the influence of Investor Attention, as reflected by Google Search Volume (GSV), on the performance metrics of firms—specifically Return (RET) and Stock Liquidity (LIQ)—within Publicly Listed Companies (PLCs) listed on the Jakarta Islamic Index (JII) of the Indonesia Stock Exchange (IDX). The investigation addresses a significant gap in the existing literature by focusing on Sharia-compliant investments within emerging markets, where the interplay between internet-fuelled investor behaviour and market outcomes remains underexplored. This gap is particularly relevant given Indonesia's rapid internet adoption rates and the burgeoning interest in Sharia-compliant financial products. Incorporating a comprehensive set of macroeconomic variables, this research provides a nuanced analysis of how broader economic conditions interact with firm performance in the context of Islamic finance. The methodological approach utilizes panel regression analysis on a robust dataset comprising 792 firm-month-year observations across 11 PLCs from January 2015 to December 2020. This period was chosen to capture the dynamic shifts in market conditions, offering a timely insight into the responsiveness of Sharia-compliant firms to global economic disruptions. Empirical findings reveal a nuanced landscape of influences: while Investor Attention does not significantly correlate with RET in relation to interest rates, it does exhibit a strong positive association with LIQ. Furthermore, the analysis highlights significant adverse effects of inflation and exchange rates on RET, underscoring the sensitivity of Sharia-compliant investments to specific macroeconomic stresses. These results contribute novel insights into the differential impact of economic factors on the returns and liquidity of firms within the JII, challenging prevailing assumptions in the field of Islamic finance. The study's implications extend beyond academia to practical applications for investors, policymakers, and industry practitioners. It elucidates the importance of leveraging internet-based metrics like GSV to gauge investor sentiment and its subsequent impact on market performance. Additionally, the findings advocate for enhanced monitoring and adaptive strategies in managing Sharia-compliant investments, particularly in volatile economic climates. Ultimately, this research not only fills a critical gap by linking internet-driven investor behaviour with financial performance in Sharia markets but also paves the way for more informed decision-making in the burgeoning sector of Islamic finance.

IFRS adoption, information asymmetry and stock liquidity: Moderating effects of corporate governance mechanisms

The purpose of this paper is to test the impact of International Financial Reporting Standards (IFRS) adoption on information asymmetry, transaction transparency, and stock market liquidity. Furthermore, this study examined the direct and moderating effect of corporate governance devices on this relationship. We apply ordinary least squares (OLS) regression to examine changes in stock liquidity for French-listed firms between the pre-IFRS and the post-IFRS period. We show that IFRS adoption is well-perceived by financial statement users. Following Boubaker et al. (2019), R. and Firoz (2022), Bansal (2023), and Agrawal and Chakraverty (2023), we found that these standards have a positive impact on stock liquidity and a negative impact on information asymmetry. In addition, audit quality has a decisive role in improving information quality. However, contrary to expectations, the independent members of the board of directors do not exercise their role of control and monitoring efficiently. We conclude that the reporting process is influenced by firm-level characteristics, and we contribute to the literature by enhancing discussion on the debate related to the benefits of IFRS adoption. Our findings can be of interest to regulatory bodies and policymakers by providing a better understanding of the factors that influence stock liquidity and decision-making.

Interaction between price discovery, market liquidity and arbitrage activity: International evidence

The aim of this study is to investigate the dynamic of price discovery for cross-listed stocks using high-frequency intraday data. We show that the local market leads price discovery process with a significant contribution of the foreign US market. Moreover, we find that arbitrage opportunities enhance market liquidity of cross-listed firms, and vice versa. A higher US market contribution to price discovery provides an increase in the local trading volume as well as in arbitrage opportunities frequency. This latter leads to greater local market contribution to price discovery confirming the information-based transactions in the domestic markets of US cross-listed firms.

Tax holidays and profit-repatriation rates for FDI firms: the case of the Czech Republic

The Czech Republic has been a promising destination for foreign investors due to its locational advantages and tax-incentive policy. However, the profit-repatriation rate in the country is extremely high, which results in less capital being available for development. This paper studies the differences in profit-repatriation rates among FDI (foreign direct investment) firms in the Czech Republic after the appearance of tax-holiday incentives from 2008 to 2019. The precondition is to find the determinants of the repatriation rate of FDI firms, and the results show that the profit repatriation rate of FDI firms is positively affected by firm size and the liquidity of firms and negatively affected by investment opportunities and leverage. The paper divides FDI firms into several groups and examines the differences in repatriation rates between them before revealing the determinants of these differences. Firstly, there is no difference in profit repatriation between FDI firms with tax incentives and those without tax incentives. Next, we divide the FDI firms with tax incentives into two groups: those who still enjoy the tax incentives and those who no longer enjoy the tax incentives. The FDI firms with tax incentives that are in the tax-incentive period repatriate less than FDI firms with tax incentives that are not in the tax period any longer. The difference stems from the endowment effect, and three determinants that can reduce the repatriation rate of FDI firms that are no longer in the tax period are investment opportunities, leverage, and firm size.

Firm Performance in China: An Analysis of the Interplay between Financial Leverage, Firm Liquidity, and Firm Size

Purpose: The aim of this research is to investigate the association between financial leverage, firm liquidity, and firm size with the performance of companies in China.
 Design/Methodology/Approach: The study adopted a quantitative approach and gathered secondary data from 2010 to 2022 from firms listed on the China Stock Exchange via the wind database. Using a fixed effect model, we empirically tested our hypotheses.
 Findings: The study's outcomes indicate that firm liquidity and firm size significantly affect a company's performance in China. Moreover, the study claims that financial leverage also plays a significant role in influencing firm performance.
 Conclusion: In conclusion, findings indicate the importance for corporate managers, policymakers, and investors to consider factors such as financial liquidity and firm size when making decisions related to firm performance, particularly in an emerging stock market.
 Implications/Originality/Values: These findings have important implications for corporate managers, policymakers, and investors. Corporate managers, investors, and policymakers should focus on policies that promote financial stability and economic growth. Overall, this study provides valuable insights into the factors that influence firm performance in China.

The interplay of financial reporting quality and investment efficiency: evidence from the USA

Purpose This study aims to comprehensively examine the relationship between financial reporting quality (FRQ) and investment efficiency (IE). The central thrust of this research endeavor is to empirically analyze the impact of FRQ on diverse facets of investment, including overinvestment, underinvestment and overall IE. Design/methodology/approach Using a sample of 13,902 firm-year observations from publicly listed US companies, this study uses the generalized method of moment (GMM) in conjunction with three distinct measures for FRQ under three different investment settings, considering firm liquidity and industry performance. Findings This study offers interesting insights into the intricate relationship between FRQ and IE. The results indicate a strong positive relation between the two constructs. In particular, the research reveals a negative link between FRQ and underinvestment, and an inverse relationship between FRQ and overinvestment. These findings suggest that FRQ is one of the key drivers of IE and that by enhancing FRQ, businesses can better optimize their investments. Practical implications This study highlights the significant implication of the effect of FRQ on IE, as it enables businesses to optimize their investments by improving their decision-making processes and better risk assessment of associated projects, resulting in more efficient capital allocation. A higher degree of FRQ increases investors’ confidence in a company’s financial statements, resulting in higher liquidity. It can benefit regulators to set higher standards and promote transparency. Originality/value The study examines the relationship between FRQ and IE. The study finds a strong positive relation between FRQ and IE, with FRQ being a key driver of IE. The paper’s original contribution lies in its comprehensive examination of the complex relationship between FRQ and IE, using robust analytical techniques by applying GMM and taking into consideration firms liquidity and industry performance.

Dividend policy and firm liquidity under the tax imputation system in Australia

PurposeThe primary goal of this paper is to investigate the relationship between stock market liquidity and firm dividend policy within a market implementing the tax imputation system. The main aim is to understand how the tax imputation system influences the relationship between firm dividend policy and stock market liquidity within a cross-sectional framework.Design/methodology/approachThis paper investigates the relationship between stock market liquidity and the dividend payout policy under the full tax imputation system in the Australian market. This study uses the Generalized Least Squares regressions with firm- and year-fixed effects.FindingsIn contrast to the negative relationship between the liquidity of common shares and the firms' dividends documented in countries with the double tax system, the study reveals that in Australia, the dividend payout ratios are positively associated with liquidity after controlling for various explanatory variables with both the contemporaneous and lagged time periods. Such a finding is robust to the use of alternative liquidity proxies and to the sub-period tests and remains during the COVID-19 pandemic period.Research limitations/implicationsThe insights derived from this study have significant implications for various stakeholders within the economy. The findings provide regulators with valuable insights to conduct a more holistic assessment of how the tax system impacts the economy, especially concerning the dividend choices of firms. Within the context of a full tax imputation system, investors can make investment decisions without factoring in the taxation impact. Simultaneously, firms can be relieved of concerns about losing investors who prioritize liquidity, particularly when a high dividend payout might not align optimally with their financial strategy.Originality/valueThis study contributes to the literature by extending the literature on the tax clientele effects on dividend policy, providing evidence that the tax imputation system can moderate the impact of liquidity on dividend policy. This study examines the impact of the dividend tax imputation system on the substitution effect between dividends and liquidity.