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Stock Market Liquidity and Firm Value: An Empirical Examination of the Australian Market
Author(s) -
Nguyen Trang,
Duong Huu Nhan,
Singh Harminder
Publication year - 2016
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12082
Subject(s) - market liquidity , market value added , monetary economics , stock market , enterprise value , liquidity crisis , economics , business , leverage (statistics) , market maker , financial economics , financial system , finance , paleontology , horse , machine learning , computer science , biology
We document a positive relation between stock liquidity and firm value. We examine the mechanism through which stock market liquidity enhances firm value by dividing firm value, as measured by Tobin's Q, into three components, namely, operating income to price, leverage, and operating income to assets. Using the switch to broker anonymity as an exogenous shock to market liquidity, we show that the increase in liquidity around the shock leads to an increase in firm value. Our results suggest that higher firm value for more liquid stocks seems to stem from enhanced stock prices rather than from better operating performance.