Stock Liquidity Research Articles

The Effect of Changes in Tax Laws on Stock Liquidity: Evidence From the Tax Cuts and Jobs Act

ABSTRACTThis paper investigates the effect of the Tax Cuts and Jobs Act of 2017 (TCJA) on stock liquidity. The TCJA brought significant changes, including a reduction in corporate tax rates and provisions incentivizing the repatriation of foreign earnings. We find a negative association between TCJA‐related events and the liquidity of U.S. stocks, persisting even up to 60 days following legislative announcements. However, despite the negative impact on liquidity, there is evidence of improved price efficiency following the TCJA enactment, driven by increased informed trading. Additionally, our analysis extends to non‐U.S. stocks traded in U.S. markets and indicates similar relations.

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.

Impact of using derivatives on stock market liquidity

This study demonstrates that using derivatives can significantly improve stock liquidity. We conduct several tests to check for robustness of our findings and control for potential endogeneity in our results. We observe that the decrease in stock illiquidity due to derivative usage is more pronounced for firms with high information asymmetry, high firm-specific risk, and negative investor sentiment. Ownership stakes held by foreign institutional investors and domestic promoters do not influence how derivative usage affects stock liquidity. This relationship is significant in the presence of large and independent boards. Our results emphasize the liquidity creation role of derivative usage, which complements other functions of derivatives markets, such as price discovery and risk management. Our findings are relevant for companies operating in foreign capital markets and for international investors who include Indian stocks into their portfolios.

Optimization of High-Frequency Trading Strategies Using Deep Reinforcement Learning

This study presents a new method for optimising high-risk trading (HFT) strategies using deep learning (DRL). We propose a multi-time DRL framework integrating advanced neural network architectures with sophisticated business data processing techniques. The framework employs a combination of convolutional neural networks for manual order analysis, short-term memory networks for time series processing, and a multi-head listening mechanism for body fusion. We formulate the HFT problem based on Markov Decision Processes and use the Proximal Policy Optimization algorithm for training. The model is evaluated using tick-by-tick data from the NASDAQ exchange, including ten liquid stocks in 6 months. The experimental results show the superiority of our method, achieving a Sharpe ratio of 3.42, outperforming the learning model and machine learning based on benchmarks up to 33%. The proposed strategy has demonstrated strong performance across a wide range of regulatory markets and has shown potential for strategic objectives. Sensitivity analysis confirms the model's stability across a range of hyperparameters. Our findings suggest that the DRL-based approach can improve HFT performance and provide better market adaptation and risk management. This research leads to the continuous evolution of algorithmic trading strategies and shows the potential of AI-driven approaches in financial markets.

Does board gender diversity improve stock liquidity?

PurposeFirms with gender diverse boards have been shown to have increased transparency and disclosure, resulting in reduced information asymmetry, which is a key factor influencing stock liquidity. This paper explores the influence of information asymmetry resulting from board gender diversity on stock liquidity. We examine the impact of gender diverse firms on stock liquidity in US listed firms from 2006 to 2022, capturing 28,280 firm-year observations across 4,349 firms. Using mediation models, we distinguish between direct and mediated effects to examine the impact of gender diverse boards on three dimensions of stock liquidity. We find a positive and significant relation between board gender diversity and stock liquidity, and our findings highlight the substantial mediating role of information disclosure in this association. To address concerns of endogeneity, we use instrumental variables regression, and our conclusions remain robust to a range of alternatives.Design/methodology/approachTo investigate the association between board gender diversity and stock liquidity and the underling mechanism that drives the relation, we utilize a dataset comprising 4,349 listed US firms from 2006 to 2022. We adopt a comprehensive approach to measure stock liquidity that spans three dimensions: Amihud illiquidity (LIQ) as a representation of price impact, the quoted spread (SPREAD) to gauge transaction costs and the stock turnover (TURNOVER) to assess trading frequency. To evaluate board gender diversity, we examine female directors and female independent directors, utilizing both the percentage and the presence (as a binary variable).FindingsThe results of our analysis reveal not only a statistically significant effect of board gender diversity on liquidity but also demonstrate its economic significance. One standard deviation increase in the percentage of female directors (12% more female directors) is associated with a 5.8% decrease in price impact, a 5.1% reduction in transaction costs and a 3% increase in trading frequency. These findings highlight the material economic importance of the relationship, which stands in contrast to previous studies reporting only a 1% change in average stock liquidity in the Australian stock markets (Ahmed and Ali, 2017). To further investigate the underlying mechanism driving the association between board gender diversity and liquidity, we employ mediation models to separate the direct and mediated channels. Our results indicate that the effects of the percentage of female directors are mediated on liquidity (LIQ, SPREAD, and TURNOVER) through information disclosure, albeit with a relatively small magnitude (mediation proportion is 18.2, 3.9 and 22.9%, respectively).Research limitations/implicationsWe include a comprehensive set of variables in our analysis and adopt an instrumental approach to mitigate endogeneity concern. However, we acknowledge the possibility of omitted variable biases or reverse causality in our empirical analysis.Practical implicationsOur study contributes to the understanding of the association between board gender diversity and stock liquidity, focusing on the underlying mechanisms. Gender diversity on boards enhances corporate governance, leading to reduced managerial opportunism (Adams and Ferreira, 2009; Nielsen and Huse, 2010). This, in turn, increases information transparency and results in increased stock liquidity. By exploring the empirical evidence of the impact of gender diverse boards on stock liquidity through the information channel, we provide valuable insights to the existing literature. Our study uses US data to examine this association, addressing the small sample concerns of prior research that may have contributed to inconsistent findings.Social implicationsThis research can drive both economic and social transformations as it provides evidence that gender diverse boards lead to improved market outcomes.Originality/valueOur study differs from previous research by incorporating all three dimensions of liquidity, ensuring a comprehensive analysis. Through our investigation, we aim to deepen understanding of how gender diversity on corporate boards shapes market dynamics and contributes to understanding of corporate governance and market efficiency. Our study investigates how the impact occurs by employing mediation models to separate the direct and mediated channels of impact. We show that the effects of gender diverse boards on liquidity are mediated through information disclosure.

투자심리와 주식 유동성 간의 관계

This paper empirically investigates the relation of investors' sentiment and stock liquidity. Particularly, this research explores whether investors' sentiment is related to stock liquidity and whether the level of individual trading and information environment in each firm affects the relation. Three hypotheses were drawn and tested. To test the hypotheses, stock prices and relevant data of firms listed on Korea Exchange(KRX) were put together, and the hypotheses were studied by panel and Fama-MacBeth regressions. This research discovers that investor sentiment has positive effects on stock liquidity. Further, this study finds that the level of individual trading and the level of information environment increases the positive relation between investors' sentiment and stock liquidity. This work finds individual trading and information has a certain role in the relationship between investors sentiment and stock liquidity. The findings suggest that increased investor sentiment may cause noise trading to increase. In addition, firms with more uninformed trading may have a more liquid stock market.

Do CEOs' Industry Tournament Incentives Affect Stock Liquidity?

ABSTRACTResearch Question/IssueWe examine the relationship between CEOs' industry tournament incentives (CITI) and stock liquidity in the United States. We also examine if the effect of CITI on stock liquidity varies depending on the information‐asymmetry and corporate governance mechanisms.Research Findings/InsightsWe find that firms with stronger CITI are associated with greater stock liquidity. Exploiting the enforceability of executive noncompetition agreements across the states in the United States as a quasi‐natural experiment, we find that firms headquartered in states that introduce these agreements on average experience lower stock liquidity, suggesting a causal relation. We also find that the effect of CITI on stock liquidity is stronger among firms with severe information‐asymmetry problems, but weaker among firms with strong governance mechanisms.Theoretical/Academic ImplicationsWe extend research that examines the impacts of CEO industry tournament incentives on corporate outcomes and strategies. Our paper shows that CEO industry tournament incentives matter for stock liquidity. Our paper contributes to a large literature on the roles of CEO styles and behaviors in shaping corporate policies.Practitioner/Policy ImplicationsOur findings have several practical implications for investors, policymakers, and financial analysts. For example, our findings can help investors better understand how CEOs' compensation‐based incentives impact stock liquidity. Similarly, policymakers can use our findings to design policies that encourage CEOs to act in the best interest of their shareholders and promote market efficiency.

Opinion divergence, investor sentiment, and stock liquidity: Evidence from social media

ABSTRACT This paper developed a mediating effect model of retail opinion divergence, investor sentiment, and stock liquidity to investigate how investor comments and bullish-bearish-polling activities on social media affect investors’ attitudes and behaviours, thus, the stock market. The paper first used the Python programming language to scrape the bullish-bearish-polling outcomes for each stock and developed an investor opinion divergence index. Next, the study collected online investor comments, from which an online investor sentiment index was developed through machine-learning-based ways. The analysis results show that both investor sentiment and retail opinion divergence significantly impact stock liquidity, and investor sentiment plays a mediating role in it.

Information Asymmetry Effect on Stock Liquidity Effect on Dividend Payout in Market Microstructure in Indonesia

The impact of market microstructure in shaping corporate governance has been distinguished in several previous research. Market Microstructure becomes prominent factor in emerging markets. This study tested the effect of market microstructure, in the scheme of stock liquidity, on dividend payouts. This study has set focus mainly on the impact of stock liquidity on the corporate payout policy. Later, the researcher examined the interaction given to the stock liquidity factor with information transparency and agency problem properties since the researcher believed that transparency is linked to the and, subsequently, affecting the corporate agents. This research examined observations using quantitative research method, Tobit regression on 256 non-financial firms of the Indonesian capital market during 2010-2018. Stock liquidity significantly impacted dividend policy. The result showed robustness with other stock liquidity measures. This study found that information asymmetry and agency problems had a moderation effect on stock liquidity effect on dividend payout. However, the interaction of stock liquidity and disparity of control rights and cash flow rights did not give a moderation effect on the dividend payout policy. The result supports the notion that dividend payout is an outcome of firm good governance and an inverse of dividend signaling theory.

Impact of Equity Liquidity on Corporate Value—— Based on The Empirical Analysis of China's A-Share Listed Companies

Since the establishment of the Shanghai and Shenzhen Stock Exchange, China's stock market has experienced a development process from scratch, from small to large, and from weak to strong. During this period, the liquidity of China's stock market has increased significantly. The stock market can affect the real economy by changing the motivation and influencing the behavior of enterprises, which is crucial to economic development. Many scholars at home and abroad have studied the impact of stock liquidity on enterprise value from different perspectives. This paper finds that the stock liquidity has a significant positive impact on the value of enterprises. The higher the level of stock liquidity, the higher the enterprise value, and the company's equity structure can play a role as an intermediary variable in the process of stock liquidity affecting the enterprise value.

Effect of media freedom on liquidity and information asymmetry: evidence from non-U.S. stocks in the NYSE

ABSTRACT While previous studies have mainly explored the impact of media freedom on macroeconomic variables, there is a relative scarcity of research on how media freedom affects stock markets. This paper examines the relationship between media freedom and the liquidity and information asymmetry of non-U.S. stocks listed on the New York Stock Exchange by demonstrating how these factors affect the liquidity dynamics of stocks from countries with varying degrees of media freedom. Ultimately, this study reveals that non-U.S. stocks from countries with limited press freedom experience poorer market liquidity. These conclusions hold even when considering a broader concept, voice and accountability, which includes media freedom, as well as different measures of liquidity and asymmetry, which reaffirms the reliability of the results. Our research illustrates the vital significance of media freedom in enhancing the liquidity of individual company stocks and mitigating market information asymmetry, suggesting that a nation’s press freedom can profoundly influence its stock market performance.

Detecting rough volatility: a filtering approach

In this paper, we focus on filtering and parameter estimation in stochastic volatility models when observations arise from high-frequency data. We are particularly interested in rough volatility models where spot volatility is driven by fractional Brownian motion with Hurst index H < 1 2 . Since volatility is not directly observable, we rely on particle filtering techniques for statistical inference regarding the current level of volatility and the parameters governing its dynamics. In order to obtain numerically efficient and recursive algorithms, we use the fact that a fractional Brownian motion can be represented through a superposition of Markovian semimartingales (Ornstein-Uhlenbeck processes). We analyze the performance of our approach on simulated data and we compare it to similar studies in the literature. The paper concludes with an empirical case study, where we apply our methodology to high-frequency data of a liquid stock.

Manager political preferences and company investor bases

AbstractWe investigate how the personal political preferences of top managers shape the investor base of firms. Based on the risk‐aversion attitude of firm decisions that rely on conservative political ideologies, we find that Republican managers tend to maintain a lower leverage level; invest less in tangible assets and R&amp;D to pursue near‐term profitability; and maintain a high quality of information disclosure to increase stock liquidity. We demonstrate that firms led by Republican managers can attract more transient institutions. This relationship becomes stronger during financially stressful periods and is robust after considering the moderating role of managerial discretion and potential endogeneity.

Free Float and Stock Liquidity: Evidence from Pakistan Stock Exchange

Liquidity has become increasingly important in the stock market, highlighting its vital role in enabling high-volume trading with minimal price distortion, speed, and convenience. This study is carried out to examine the relationship between free float and stock market liquidity using different ratios and models namely, Amihud, Amivest and turnover. For this purpose, a sample of top 100 listed companies are selected from Pakistan Stock exchange (PSX) from 2013 to 2022. An inverse relationship between free float and liquidity was found using Amihud ratio whereas turnover ratio supports the notion of improved liquidity with increased free float. This study highlights the importance of free float in capital markets and offers practical advice for businesses and individuals navigating the complexities of stock liquidity. While our paper contributes to the current body of literature, it also invites additional investigation by bringing in a variety of variables and broadening the focus outside of Pakistan's KSE 100 index companies.

Stock price synchronicity and stock liquidity: International evidence

We examine the relationship between stock price synchronicity and stock liquidity using a comprehensive data set across 40 countries. Our local (within-country) empirical results reveal a positive relationship between local synchronicity and stock liquidity. The strength of this positive relationship depends on the quality of country-level institutions; the weaker the institutional environment, the stronger the synchronicity-liquidity relationship. Importantly, our global (across-country) findings mirror those at the local level. Overall, our study provides a comprehensive analysis of the synchronicity-liquidity relationship at both the local and global levels. In addition, our cross-sectional analyses provide new evidence on the institutional determinants of this relationship.

Emerging Stock Market Integration and Corporate Bond Credit Spreads

ABSTRACT Stock market integration into the world financial markets has been a common and important practice in emerging countries over the past several decades. Relying on the staggered inclusion of China A-shares into MSCI indexes, we employ a difference-in-differences analysis and find that bond credit spreads of firms significantly decrease after the firms’ stock securities are included in the MSCI indexes. We also find that stock market integration reduces credit spreads by improving the stock liquidity, firm reputation, and alleviating information asymmetry. The effect is more pronounced among firms with greater financial constraints or higher performance volatility. Overall, our study provides evidence that emerging stock market integration can generate bond market benefits for firms.

An Analysis of the Influence of Liquidity Ratios, Stock Prices, Profitability, and Capital Structure on Earnings Growth as an Intervening Variable

Investment in the food and beverage (F&amp;B) sector has become increasingly popular. This study analyzes the impact of financial ratios on the firm value of F&amp;B companies listed on the IDX during the 2019-2023 period. The results show that the liquidity ratio (X1) and capital structure (X3) significantly influence firm value (Y) through the mediation of company growth (Z). Conversely, stock price profitability (X2) does not significantly impact firm value (Y) through the mediation of earnings growth (Z). These findings suggest that investors should consider these ratios when making investment decisions, as they can optimize their portfolios and achieve long-term financial goals. This research contributes to the financial literature by providing empirical evidence on the factors affecting firm value in the F&amp;B sector in Indonesia. Additionally, intelligent investing can yield optimal financial returns for investors.

Seeking common ground: CSR conformity and stock liquidity

This paper investigates the impact of CSR conformity on stock liquidity from a legitimacy perspective. Based on the sample of Chinese listed firms from 2009 to 2021, the results reveal that CSR conformity mitigates legitimacy pressures, thereby significantly improving stock liquidity. Notably, this effect is primarily driven by the increased involvement in stakeholder-related CSR activities rather than third-party CSR activities. In addition, this liquidity-boosting effect is more pronounced in firms with more analyst attention and with higher institutional investor shareholding.

The dynamic effects of debtor bankruptcy on unsecured creditors' stock liquidity

This paper explores the dynamic effects of counterparty risk on stock liquidity using data on unsecured creditors after a debtor has declared bankruptcy. Through matched pair fixed effect panel regressions, we find that liquidity for unsecured creditors reduces after such declarations but only in the short term. This is evidenced by increases in various spread measures and Kyle's (1985) lambda and decreases in the bid depth differentials between the stocks of the unsecured creditors and the matched firms. Additionally, we find the greater the credit exposure, the greater the decline in liquidity. In the long term, debtor bankruptcies appear to have no effect on spread measures. Rather, the market depth for unsecured creditor stocks improves.

Motives for environmental and social engagement and stock liquidity: The moderating role of sustainability committees

While stock liquidity has long been a vital consideration in stock markets, environmental, social and governance (ESG) performance has become a growing consideration due to its numerous benefits to companies and society. However, there is limited research on whether corporate motivations to engage in ESG activities affect stock liquidity. We examine this relationship in the context of the Australian Securities Exchange (ASX) by studying the role of three motivations (strategic, altruism, or greenwashing) for company engagement in ESG activities in explaining stock liquidity. We also examine the role of sustainability committees in explaining stock liquidity. Using companies included in the S&P ASX 300 from 2009 to 2018, a positive association is found between stock liquidity and a strategic motivation for environmental and social engagement and sustainability committee presence. An unexpected finding is that sustainability committee formation can mislead investors to reward a greenwashing motivation by improving stock liquidity. These findings provide valuable new insights into motives to engage particularly with the “E” and “S” in ESG and sustainability committees' role in improving stock liquidity.