Management Science Letters

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1 Managemen Science Leers 3 (2013) Conens liss available a GrowingScience Managemen Science Leers homepage: A survey on he relaionship beween sock liquidiy wih firm performance: A case sudy of Tehran Sock Exchange Hasan Ghalibaf Asle a, Mohammad Khodaei Valahzaghard b* and Babak Asadi Ahranjani c a Assis. Prof. & Faculy Member, Deparmen of Managemen, Faculy of Social sciences and Economics, Azahra Universiy, Tehran, Iran b Assis. Prof. & Faculy Member, Deparmen of Accouning, School of Managemen and Human Sciences, Tehran Norh Branch, Islamic Azad Universiy (IAU), Tehran, Iran c M.A. Suden, Faculy of financial sciences, Universiy of Economic Sciences, Tehran, Iran C H R O N I C L E A B S T R A C T Aricle hisory: Received Ocober 15, 2012 Received in revised forma 1 December 2012 Acceped 2 December 2012 Available online December Keywords: Tobin s Q Illiquidiy Tehran Sock Exchange Liquidiy play an imporan role on performance of firms lised in Sock Exchange. When here is a good flow of rading socks, people could expec more financing hrough absorbing invesors on marke. The proposed sudy of his paper invesigaes he relaionship beween Tobin s Q and illiquidiy in some seleced firms in Tehran Sock Exchange. The proposed sudy selecs non-financial socks over he period of The resul of he survey indicaes ha here is a negaive relaionship beween illiquidiy and Tobin s Q bu he raio is approximaely seven percen. In oher words, as illiquidiy increases by one percen, we could expec only a small change in firms performance Growing Science Ld. All righs reserved. 1. Inroducion Liquidiy play an imporan role in performance of firms lised in Sock Exchange. When here is a good flow of rading socks, people could expec more financing hrough absorbing invesors on marke. Admai and Pfleiderer ( 2009) invesigaed wheher a large shareholder could ease conflics of ineres beween managers and shareholders hrough he credible hrea of exi on he basis of privae daa. In his model, he hrea of exi ofen alleviaed agency coss, bu addiional privae daa were no required o enhance he effeciveness of he mechanism. In addiion, he hrea of exi produces various impaced depending on wheher he agency issue involves desirable or undesirable acions from shareholders' perspecive. Agrawal e al. (2004) invesigaed he relaionship beween bid and ask and heir spread by sudying invesors informaion. Amihud and Mendelson (1986) in oher sudy invesigaed he relaionship beween bid-ask and asse pricing. * Corresponding auhor. Tel: addresses: m_khodaei@iau-nb.ac.ir (M. Khodaei Valahzaghard) 2013 Growing Science Ld. All righs reserved. doi: /j.msl

2 636 According o Amihud and Mendelson (2008), liquidiy and he value of he firm could help absorb more liquidiy. Amihud and Mendelson (2000), in oher sudy, indicaed ha when here was more liquidiy wih firm, we could expec beer financing wih lower cos (Edmans, 2009). Amihud (2002) invesigaed he illiquidiy and sock reurn using cross-secion and ime series analysis. Chung e al. (2010) sudied he relaionship beween corporae governance and liquidiy. Chordia e al. (2010) sudied he relaionship beween marke liquidiy and rading aciviy and indicaed ha increasing he amoun of rading aciviy could increase liquidiy in he marke. Coffee (1991) performed an invesigaion on he relaionship beween liquidiy and conrol wihin he conex of he insiuional invesor as corporae monior. Goldsein and Guembel (2008) invesigaed marke manipulaion and he allocaional role of prices in sock marke. Khanna and Soni (2004) did similar invesigaion and discussed how price manipulaion could harm long-erm invesmen. Gompers e al. (2003) invesigaed corporae governance and equiy prices using a comprehensive analysis on daa gahered from sock marke. Hasbrouck (2009) sudied rading coss and reurns for US equiies by esimaing effecive coss from daily daa. Hassani and Mahdavi Sabe (2012) invesigaed he explanaory power of leverage and cash flows in fuure cash flow predicion in Tehran Sock Exchange by invesigaing Signaling Theory and Pecking Order Theory. They implemened he regression models of leverage and cash flow wih a se of conrol variables based on heoreical foundaions. Saisical samples included of firms lised in Tehran Sock Exchange over he period The resuls demonsraed ha here was a negaive relaionship beween cash flow and leverage levels in conemporary ime and he resul was consisen wih pecking order behavior. Holmsrőm and Tirole (1993, 2001) invesigaed he effecs of liquidiy on performance monioring and asse pricing. Adhami and Asghari (2013) considered he impac of block ownership on performance of firms in erms of profiabiliy. They developed wo economeric models and applied hem on seleced firms from Tehran Sock Exchange over he period The aim was o find he relaionship beween reurn of asses and Tobin's Q as dependen variables wih eigh independen variables including company size, sales growh, block ownership, deb and liabiliy raios, ec. The resuls of implemenaion of ordinary leas squares on wo economeric models disclosed ha while here was no meaningful relaionship beween reurn of asse and block ownership here was a meaningful relaionship beween block ownership and Tobin's Q. The proposed sudy of his paper invesigaes he relaionship beween Tobin s Q and illiquidiy. The proposed sudy presens deails of he implemenaion in secion 2. Secion 3 presens deails of he finding and concluding remarks are given in he las o summarize he conribuion of he paper. 2. The proposed sudy The proposed sudy of his paper invesigaes he relaionship beween Tobin s Q and illiquidiy in some seleced firms in Tehran Sock Exchange. The proposed sudy selecs non-financial socks over he period of We use Amihud s mehod (Amihud, 2002) o measure iliquidiy, which is based on Tobin Q and i is calculaed as follows, Reurn Illiq mean (1) =. Trading Volume Noe ha his raio is no defined zero for days wih zero reurn bu all days wih zero reurn are considered zero. This measure is more suiable for counries where here are no much srong economical infrasrucures. Tobin Q is one of he ways o measure he performance of differen firms and i can be calculaed as follows,

3 QTobin S _ MV + STD_ BV + LTD_ BV =, TA_ BVi, H. Ghalibaf Asle e al. / Managemen Science Leers 3 (2013) 637 where S_MV is marke value of firm i a ime, STD_BV is he book value of shor erm debs of firm i a ime, LTD_BV is he book value of long erm liabiliies of firm i a ime and finally TA_BV is oal asse book value of firm i a ime. (2) In his survey, we have considered six variables including rades, acive days of rading, he number of buyers, Tor, Tobin Q and illiquidiy. Table 1 summaries deails of mean, median, max, min and skewness. Table 1 Indices of sudy variables descripive saisics Saisical Obs. Trades day Mean Median Max Min Sd. dev Skewness Kurosis N. of Obs buyer Tor obinq Illiq 2.62E E E E Table 2 demonsraes correlaion value along wih P-value among differen variables. Table 2 Correlaion values among differen componens and P-value for he firs hypohesis TobinQ buyer rades day Tor buyer P-value rades P-value day P-value or P-value Illiq P-value As we can observe from he resuls of Table 2, here is a negaive correlaion beween illiquidiy and Tobin-Q when he level of significance is one percen. There is also a posiive correlaion beween illiquidiy and he number of buyers, number of ransacions, number of rading days and rading volume. We have also used Hausman Tes o find ou wheher we should use fixed or variable mehod and he es examines he following hypohesis, H 0 : Random effecs H1 : Fixed effecs The Hausman es calculaes he following raio o perform he es, -1 H = nqˆ (Avar(q)) ˆ qˆ, (3) where ˆq is he esimaed difference for descripive variables, Avar represens he variance of observaions and n is he number of observaions. The resuls of Hausman es on cross-secion random es yields Chi-Square value of wih P-value of Therefore, he null [

4 638 hypohesis is rejeced and we can conclude ha i is beer o use fixed effec mehod for regression analysis. 3. The resuls The main hypohesis of his survey examines he relaionship beween Tobin Q and illiquidiy of firms. In order o es his hypohesis, we need o examine he following regression model, = + +. (4) Before we use ordinary leas square echnique o es he model, we need o use perform panel uni roo es on boh independen and dependen variables o make sure he daa are saionary. Table 3 demonsraes deails of our findings, Table 3 Panel uni roo es on TobinQ and IlliQ TOBINQ ILLIQ Mehod Saisic Prob.** Saisic Prob.** Levin, Lin & Chu * Breiung -sa Im, Pesaran and Shin W-sa ADF - Fisher Chi-square PP - Fisher Chi-square As we can observe from he resuls of Table 3, here is no uni roo wih eiher independen or dependen variable. The oher es is learn more abou he cause and effec beween hese wo variables using cause and effec es based on Pairwise Granger Causaliy es. Table 4 demonsraes deails of he resuls. Table 4 The resuls of Pairwise Granger causaliy es Null Hypohesis: ILLIQ does no Granger Cause TOBINQ TOBINQ does no Granger Cause ILLIQ F-Saisic Prob As we can observe from he resuls of Table 4, we can rejec he null hypohesis and conclude ha here is a wo-side relaionship beween hese wo variables. We have performed a regression es on Eq. (4). Durbin-Wason is calculaed as 1.13, which means here is a correlaion beween he residuals. Therefore, we add a new erm of AR(1) o remove he auocorrelaion beween residuals as follows, = (5) Table 5 demonsraes deails of he implemenaion of ordinary leas square echnique on Eq. (5). Table 5 The resuls of regression analysis of using Cross-secion fixed (dummy variables) Variable Coefficien -Saisic Prob C ILLIQ AR(1) R-squared F-saisic Prob(F-saisic) Durbin-Wason sa As we can observe from he resuls of Table 5, all -suden values are saisically significan, which means all individual coefficiens are meaningful. Durbin-Wason is equal o , which means

5 H. Ghalibaf Asle e al. / Managemen Science Leers 3 (2013) 639 here is no auocorrelaion among independen variables. F-value is equal o 9.100, which saes here is a linear relaionship beween all independen variables. Finally, R 2 =0.63, which means he independen variables of his regression analysis presen approximaely 63% of he changes on dependen variable. According o Table 5, here is negaive relaionship beween illiquidiy and Tobin Q. In oher words, an increase of uni in illiquidiy will reduce Tobin Q by uni. In oher words, when sock marke gains more liquidiy, we could expec a beer performance on sock marke reurns. 4. Conclusion In his paper, we have presened an empirical sudy o invesigae he relaionship beween Tobin s Q and illiquidiy in some seleced firms in Tehran Sock Exchange. The proposed sudy seleced nonfinancial socks over he period of and we have confirmed ha he daa were saionary. The proposed sudy of his paper has implemened ordinary leas square echnique o sudy he relaionship beween Tobin s Q and illiquidiy. The resul of he survey indicaes ha here is a negaive relaionship beween illiquidiy and Tobin s Q bu he raio is on seven percen. In oher words, as illiquidiy increases by one percen, we could expec only a small change in firms performance. Acknowledgmen The auhors would like o hank he anonymous referees for consrucive commens on earlier version of his paper. References Adham S., & Asghar M.R. (2013). Block share ownership and corporae earning: Evidence from Tehran Sock Exchange. Managemen Science Leers, 3(1), Adma A.R., & Pfleiderer, P. ( 2009). The wall sree walk and shareholder acivism: exi as a form of voice. Review of Financial Sudies, 22(7), Agrawal, V., Kohare, M., Rao, R. K., & Pavan, W. (2004). Bid-ask spreads, informed invesors, and he firm's financial condiion. Journal of he Midwes Economics Associaion, 44(1), Amihud, Y., & Mendelson, H. (2008). Liquidiy, he value of he firm, and corporae finance. Journal of Financial Applied Corporae Finance, 20(2), Amihud, Y., & Mendelson, H. (2000). The liquidiy roue o a lower cos of capial. Journal of Financial Applied Corporae Finance, 12(4), Amihud, Y. (2002). Illiquidiy and sock reurns: cross-secion and ime- series effecs. Journal of Financial Markes, 5, Amihud, Y., & Mendelson, H. (1986). Asse pricing and he bid ask spread. Journal of Financial Economics, 17, Chung, K.H., Elder, J., & Kim, J.C. (2010). Corporae governance and liquidiy. Journal of Financial and Quaniaive Analysis, 45, Chordia, T., Roll, R., & Subrahmanyam, A. (2001). Marke liquidiy and rading aciviy. Journal of Finance, 56, Coffee, J. (1991). Liquidiy versus conrol: he insiuional invesor as corporae monior. Columbia Law Review, 91, Edmans, A. (2009). Blockholder rading, marke efficiency, and managerial myopia. Journal of Finance, 64(6) Goldsein, I., & Guembel, A. (2008). Manipulaion and he allocaional role of prices. Review of Economic Sudies, 75,

6 640 Gompers, P., Ishi J., & Merick, A. ( 2003). Corporae governance and equiy prices. Quarerly Journal of Economics, 118, Hasbrouck, J. (2009). Trading coss and reurns for US equiies: esimaing effecive coss from daily daa. Journal of Finance, 64, Hassan M., & Mahdavi Sabe, E. (2012). The examinaion of signaling heory versus pecking order heory: Evidence from Tehran Sock Exchange. Managemen Science Leers, 3(1), Holmsrőm, B., & Tirole, J. (1993). Marke liquidiy and performance monioring. Journal of Poliical Economy, 101, Holmsrőm, B., & Tirole, J.(2001). LAPM: liquidiy-based asse pricing model. Journal of Finance, 56, Khanna, N., & Son R. (2004). Value creaing sock manipulaion: feedback effec of sock prices on firm value. Journal of Financial Markes, 7,