Firm Liquidity Research Articles

The macroeconomic effects of default and debt restructuring: An agent based exploration

In this paper we investigate the economic impact of bank reactions to firm financial delinquency. In case of firm liquidity shortage, indeed, the bank commonly proposes two different solutions of debt restructuring to help large firms to recover from their financial distress situation. One option is the debt rescheduling: the bank agrees to an extension of the debt maturity, i.e., to be repaid in the following time periods. The other one is the debt relief: the bank agrees to renegotiate the terms of the debt contract, i.e, to apply a discount rate on the firm past and present debt. We find that higher bank tolerance and debt discount correspond to higher average GDP level, growth rate and volatility. Moreover, the number of recessions decreases while their duration increases. Finally, we perform a monetary policy exercise, finding that an expansionary policy coupled with higher bank tolerance would be very beneficial to the economy.

THE EFFECT OF CAPITAL STRUCTURE ON MANUFACTURING FIRMS PERFORMANCE IN NIGERIA

The main objective of this study was to examine the effect of capital structure on firm’s performance in Nigeria, using correlation and regression analysis. The study revealed that capital structure exert positive effect on profitability in Nigerian manufacturing firms, this implies that for a percentage increase in capital structure lead to 0.9 percent increased profitability. The study also revealed that capital structure exerts negatives effect on liquidity in Nigerian manufacturing firms; this implies that for a percentage decrease in capital structure lead to 20 percent decreased liquidity. The study concludes that capital structure has positive effect on firms’ performance in selected Nigerian manufacturing firms during the reviewed period. The study also revealed that capital structure exerts negatives effect on liquidity in Nigerian manufacturing firms; this implies that for a percentage decrease in capital structure lead to 20 percent decreased liquidity. The study concludes that Nigeria Manufacturing companies should relying less on liquidity and more on equity as a source of finance to boost their firm performance. The result the study recommended that Manufacturing firms should chose the most optimal capital structure, as it is the profitability that best maximizes firms value, also Manufacturing firms should encourage the use of long term debt in there capital structure since it has positive impact.

When the Going Gets Tough, the Books Get Cooked:Product Market Competition and Financial Misconduct

This paper extends the research on financial misconduct by developing a new perspective based on general strain theory, and more specifically on the strain effect of product market competition. Previous literature suggests that product market competition can provide incentives for managers, but we argue that it can also lead to financial misconduct. In so doing, we take a strain perspective in making the argument that product market competition should be positively associated with the occurrence of misconduct, as it magnifies the threat arising from the possibility of firm liquidation and executive dismissal. We also examine the effect of internal governance mechanisms that are commonly deployed to minimize the agency problem. We argue that CEO option pay will negatively moderate the relationship between product market competition and the occurrence of financial misconduct, in line with the prevailing wisdom of corporate governance research. By contrast, while board independence has often been proposed as an effective governance mechanism to reduce the number of undesirable managerial behaviors, we argue it can exacerbate the threat of executive dismissal resulting from competition, creating incentives for fraudulent behavior. An empirical study of U.S. manufacturing firms provides broad support for our arguments.

GICS and the Real Estate Reclassification Revolution

Morgan Stanley Capital International and Standard & Poor’s Dow Jones established the GICS (Global Industry Classification System) in 1999 as the first international stock classification system. On November 10, 2014, they announced that real estate would be the first new sector added to the classification system. In this study, we analyze the impacts of the GICS reclassification on price, liquidity, and volatility for firms in the real estate sector, using a large sample for the first time. Using various methods, we find higher price, more active trading, and lower price volatility in the new sector, when it was launched on September 16, 2016.

An empirical analysis of financial leverage and financial performance: Empirical evidence from Indian listed firms

The purpose of this paper is to examine the determinants of financial performance, firm liquidity and financial leverage of Indian listed firms. This study uses both static models (pooled, fixed, and random effects) and Generalized Moment Methods (GMM). Financial leverage (FINLE) is defined by the ratio of total liabilities to total assets, whereas the current ratio and the quick ratio are used as firm liquidity factors. Further, a set of financial performance determinants such as return on assets, profit after tax, return on capital employed, return on equity, and Tobin-Q are used as independent factors. The results indicated that profit after tax, return on equity, return on capital employed, and Tobin-Q are the most significant financial success variables that influence financial leverage of Indian listed companies. Furthermore, profit after tax, return on capital invested, return on equity, and Tobin-Q are considered to have a substantial effect on financial leverage among the financial success indicators. In the case of firm liquidity, the findings show that the current ratio and the quick ratio have a substantial effect on the financial leverage of Indian listed companies.

The COVID-19 pandemic and stock liquidity: Evidence from S&P 500

This study examines the influence of the COVID-19 pandemic on the stock liquidity of S&P 500 firms. We construct a daily data set for stock liquidity and the numbers of COVID-19 reported cases and deaths for the period from 1 January 2020 to 31 December 2020. The regression results show that there is a significant negative relationship between COVID-19 (as measured by the daily growth in the numbers of cases and deaths) and stock liquidity, implying that the COVID-19 pandemic decreases firm liquidity. Furthermore, our analysis reveals a significant difference in liquidity between sectors. In addition, our results remain robust to the use of an alternative proxy for liquidity and to alternative estimation approaches. The results of this study will allow key players in the stock market to recognize and forecast the behavior of stock liquidity during periods marked by pandemic diseases.

Board Structure and Stock Liquidity: An Empirical Study on Nairobi Securities Exchange

The aim of this paper was to assess the influence of board structure on the stock liquidity of firms listed at the Nairobi securities exchange. Stock market plays a crucial role in the country’s economy in that it serves as a financial market avenue to enhance openness, create trust and ensure increased firm competitiveness. The success of stock market however highly depends on its ability to trade large size quickly at low cost. This is the ease of buying and selling large quantities of shares in a stock market while not bringing any effect on the prices. The board structure has been found to play a key role as an aspect of corporate governance on firms’ financial performance but its role still remains unclear on stock liquidity of listed firms at the NSE. The study was anchored on the agency theory. It is on this merit that this paper sought to investigate the influence of board structure on stock liquidity of firms listed at the NSE. A census was carried out where all the target population comprised of the 68 firms listed at the Nairobi Securities Exchange. The study used secondary data obtained from the Nairobi securities exchange and the respective firms’ publications annual financial statements using a data collection sheet. Data analysis was done by the use of Eviews 7. The findings indicated that board structure had negative and significant influence on stock liquidity when measured by turnover but no significant influence when measured by quoted spread, illiquidity and liquidity ratio.

Board Effectiveness and Stock Liquidity Empirical Evidence at the Nairobi Securities Exchange

The aim of this paper was to assess the influence of the board effectiveness on the stock liquidity of firms listed at the Nairobi Securities Exchange. The success of security markets highly depends on stock liquidity. The ease of buying and selling of securities in the stock market while not bringing any effect on the prices. Board effectiveness has been found to play a key role as an aspect of corporate governance on firms’ financial performance but its role still remains unclear on stock liquidity of firms listed at the NSE. It is on this merit that this paper sought to fill the existing gap by establishing whether the board effectiveness influences stock liquidity of firms listed at the NSE. A census was carried out on all the 68 firms listed at the Nairobi securities exchange for the period spinning from 2014 to 2018. This study used secondary obtained from the NSE and the listed firms’ published annual financial reports. Data analysis was done using descriptive and inferential statistics. Under descriptive statistics; mean, median, minimum, maximum, and standard deviation were used and for the inferential statistics correlation and regression analysis within panel data framework were used. Data was subjected to diagnostic tests with Eviews 7 as the main statistical tool of analysis. The findings of the study indicated that board effectiveness had positive and significant influence on stock liquidity of firms listed at the NSE when quoted spread was used as measure but no significant influence when measured by turnover, illiquidity and liquidity ratio. This study recommended that more monitoring needs to be done to enable firms to reduce transaction cost. Key Words: Board Effectiveness, Stock Liquidity, Nairobi Securities Exchange. DOI: 10.7176/RJFA/12-10-12 Publication date: May 31 st 2021

Factors Affecting the Liquidity of Firms After Mergers and Acquisitions: A Case Study of Commercial Banks in Vietnam

Factors Affecting the Liquidity of Firms After Mergers and Acquisitions: A Case Study of Commercial Banks in Vietnam

The stability of dividends and its predictability: a cross-country analysis

PurposeThe authors examine the stability of dividend payout and the consistency in its predictability using sample of firms from 18 different countries amid their prevailing heterogeneous formal institutions (such as the legal system, corporate governance), the distinct state of economic development (developing vs developed) and changing times (during the crisis vs the noncrisis periods).Design/methodology/approachThe authors use tobit regression models with distinct specifications for the authors’ investigations. The authors alternately analyze the study’s results using Fama–Macbeth (FM) (1973) and generalized least square (GLS) regressions.FindingsThe authors show a sharply declining stability in dividend payout with time using DeAngelo and Roll’s (2015) framework. In terms of predictive consistency, the authors report that only a few idiosyncratic factors predict dividends consistently, and these results hold qualitatively true across the robustness analysis. The firm's liquidity appears to be the most consistent predictor of dividends payout, whereas firm's size being on the other extreme. The results signify that the idiosyncratic factors that matter for firm's dividend policy are not country specific. Instead, it reveals commonality of predictors grounded on characteristics of countries such as legal environment, investor's protection, economic state (ES) and economic cycle.Originality/valueThe authors contribute to the dividends literature by providing the evidence of dividend instability through time and disapproving the stylized fact of sticky dividends. Besides, the authors provide international evidence of inconsistent predictability of dividends.

Determinants influencing liquidity of pharmaceutical firms listed on the Hanoi Stock Exchange

Determinants influencing liquidity of pharmaceutical firms listed on the Hanoi Stock Exchange

ANALISIS FAKTOR-FAKTOR YANG MEMPENGARUHI LUAS PENGUNGKAPAN SUKARELA LAPORAN TAHUNAN PADA PERUSAHAAN PERTAMBANGAN NON MIGAS

The annual report serves as the main media in the delivery of information by the management of a company to the interested parties outside the company. The purpose of this study was to analyze the effect of firm size, leverage, liquidity, age listed and size of the public accounting firm of the voluntary disclosure on non-oil sector of the mining company listed on the Indonesia Stock Exchange (BEI). Samples were taken using purposive sampling method. There are 60 observations annual financial statements of non-oil mining company. Data analysis technique used is multiple linear regression analysis using.. The results showed that together the size of the company, leverage, liquidity, age listed and size of the public accounting firm influence on voluntary disclosure. Firm size and age listed has a positive effect on voluntary disclosure, but size of public accounting firms has a negative effect on voluntary disclosure, while leverage and liquidity does not effect on voluntary disclosure.

The Risk of Foreign Exchange Exposure of Stock Returns Concerning Non-Financial Listed Firms

The foreign exchange rate fluctuations do create an impact on stock returns, which has been investigated for non-financial listed Pakistani firms. The real effective exchange rate has been used as the true measure of foreign exchange exposure. The modelled econometric equation includes; firm size, firm liquidity, money supply and inflation as predictors of stock returns. Twenty-five non-financial listed firms have been evaluated for the study period 2004 to 2013, which signifies the military regime era proceeded by peoples party rule in Pakistan. Financial data analysis, including; ADF unit root and Johansen Co-integration tests, have been applied to evaluate financial data, which further led to correlation, descriptive stats and panel data regression analysis. The results have suggested a very weak relationship between stock returns and foreign exchange exposure. Therefore, sample non-financial listed firms have not been foreign exchange exposed; however, firm size, liquidity, money supply and inflation rates have definitely created an impact on stock returns.

Comparative Study of Environmental Disclosure in Indonesia and Malaysia: Testing Company Characteristics

There are two purposes of this study. The first is to compare the environmental disclosure practices in the annual report of Indonesian and Malaysian manufacturing companies. The second is to test the impact of firm characteristics on environmental disclosure, both in Indonesia and Malaysia. Firm characteristics are represented by firm size, profitability, liquidity, firm age, and audit firm size. Under the Slovin’s Formula and purposive sampling method, 82 Indonesian and 167 Malaysian manufacturing companies are selected. Dichotomy approaches are used to measure the dependent variable of environmental disclosure. There are 9 main aspects which include 30 items of environmental according to Sustainable Reporting Guidelines version 3.1. Different proxies consist of the natural logarithm of total assets, return on equity ratio, current ratio, the natural logarithm of firm age, and audit firm size (BIG 4 and Non-Big 4) is used as a measurement of the independent variable of firm characteristics. Comparison and relation in this study tested by analysis of descriptive statistics, t-test, and multiple regression. A score of environmental disclosure both in Indonesia and Malaysia is only 18,33%. The result indicates that the environmental awareness of businessmen in manufacturing companies still low. The result of the t-test shows that there is a difference in environmental disclosure between Indonesia and Malaysia. The multiple regression analysis shows that firm size, audit firm size, and firm age are significant predictors of environmental disclosure both in Indonesia and Malaysia. Profitability and liquidity show no influence on environmental disclosure in both countries.

The effect of corporate governance and firm-specific characteristics on the incidence of financial restatement

PurposeThis paper aims to examine the effects of corporate governance and firm-specific characteristics on the incidence of financial restatement among Malaysian public listed firms.Design/methodology/approachThe elements of corporate governance consist of board size, board independence, multiple directorships, audit committee expertise, external audit quality and executive compensation. Meanwhile, the firm-specific characteristics consist of firm age, firm performance, firm leverage and firm liquidity. The agency theory has been used to guide the study. This study used a matched-pair sample that consisted of a sample of 49 restatement firms and 98 non-restatement firms between the years 2011 and 2016. Univariate (t-test and Pearson correlation) and multivariate (logistic regression) statistical techniques were used to test the hypotheses.FindingsThe results show that there is a negative and significant relationship between executive compensation and firm performance, and the incidence of financial restatement. In addition, there is a positive and significant relationship between firm leverage and the incidence of financial restatement. However, the other corporate governance and firm-specific characteristic variables included in the study were found to be insignificant with the incidence of financial restatement. This paper provides evidence that some form of corporate governance mechanisms and firm-specific characteristics, particularly executive compensation, firm performance and firm leverage, may influence the direction and magnitude of the incidence of financial restatement. The findings indicate that optimal executive incentives may align management interests with those of shareholders. In addition, greater performance and lower leverage levels minimise firms’ financial pressure and debt covenant violation risk, which may reduce the management tendency to misstate the financial statement, and consequently, minimise the likelihood of financial restatement.Originality/valueThe main value of this paper is the effect of corporate governance and firm-specific characteristics on the likelihood of financial restatement in Malaysia. The findings of this study provide useful insights for regulators to improve and reconsider the current regulations on corporate governance mechanisms.

Impact of Covid-19 Pandemic on Liquidity and Profitability of Firms in Nigeria

Impact of Covid-19 Pandemic on Liquidity and Profitability of Firms in Nigeria

At‐risk acquirers: survival strategy or last‐ditch effort?

AbstractManagers of at‐risk firms have incentives to prolong the life of the company or to extract personal wealth prior to firm liquidation, and they can pursue a number of activities in order to achieve these goals. Prior studies have investigated the consequences of managers becoming targets for acquisition. In this study, we examine the consequences of at‐risk firms doing the opposite: buying other firms (i.e., becoming at‐risk acquirers). We find two positive consequences of becoming at‐risk acquirers. At‐risk acquirers (1) avoid delisting due to poor performance and (2) leave at‐risk status in the year following the acquisition. We also find that these benefits are only temporary and come at a cost. Specifically, at‐risk acquirers are less likely to become subsequent targets, and they quickly return to at‐risk status. These results indicate that the decision of the manager of an at‐risk firm to become an at‐risk acquirer buys the manager more time but does not help the firm.

Banks and Firms: Evidence from a legal reform altering contract design

Banks are unique in designing loan contracts. Contract design determines liquidation and continuation decisions of firms. Smaller firms are often the weaker party when interacting with their banks. We study a legal reform that aims to improve small firms’ bargaining position by altering the contractual environment. The new law gives small firms the right to prepay loans against a contractually specified penalty and requires banks to offer firms’ best-suited loan type. Using this quasi-natural experiment, we show that, while the legal reform increases overall credit availability, banks dampen the effect of the act by tilting their credit supply to loans that are unaffected by the legal change, i.e., credit lines. Using bank-firm-credit-type data, we show that banks reduce the supply of term loans by 0.7% while credit lines increase by 4%. This effect is more pronounced for borrowers with longer relationships. Our results show that reforms generate unintended consequences since banks strategically try to undo part of the regulation.

Explaining the Growth Potential of a Market Leader and Challenger: Evidence from Japan’s Telecommunications Services Industry

This study examines the growth potential of the market leader and market challenger in Japan’s telecommunications services industry. We focus on Nippon Telegraph and Telephone Corporation (NTT) and KDDI, the market leader and challenger (respectively) in terms of sales revenue, total assets, and market share. Following finance literatures, we use higher values of price–earnings ratio (P/E) and market-to-book-value-of-equity ratio (MV/BV) as the indicators of growth potential. High growth firms have the potential to outperform the overall market over a significant period of time providing a good investment opportunity for retail and institutional investors. This study uses financial data of the NTT and KDDI from the period between 2001 and 2016 and applies several regression models to examine the growth potential of the market leader and market challenger in Japan’s telecommunications services industry. Using the P/E and MV/BV as indicators of growth potential, we show that the market challenger’s growth potential is significantly higher than that of the market leader, even after controlling for firm size, liquidity, profitability, leverage, cash flow, and age.

ELEMENTS INDICATING STOCK PRICE MOVEMENTS: THE CASE OF THE COMPANIES LISTED ON THE V4 STOCK EXCHANGES

Stock markets stand as a financial mechanism that provides liquidity for firms and offers diversification benefits for investors. Stock markets in the Eastern European countries are weakform efficient which exposes them to speculative prices. This study investigates the influence of the macroeconomic and firm-specific factors on stock prices of the listed companies within the Visegrad Stock Markets. The study employs regression analyses based on a Pooled OLS and Fixed Effect models with year dummies and standard errors clustered at the country level, which are robust to autocorrelation and heteroscedasticity. Data collection consists of 55 listed companies based on the weekly stock prices, from January 2013 till December 2018. The results indicate that total equity is the only significant element that influences the individual stock prices of the companies in the four established models. Additionally, increase in supply of shares declines the current stock prices and the other way around. However, the exchange rate and inflation level indicate a negative influence on the stock prices with weaker significance. The findings show that stock markets of the V4 countries are overall inefficient since important indicators, such as economic activity, debt level, cash flow, firm size, oil, and gold prices have limited influence on the stock price movements.