Stock liquidity of Malaysian public listed firms / Chia Yee Ee

Chia , Yee Ee (2020) Stock liquidity of Malaysian public listed firms / Chia Yee Ee. PhD thesis, Universiti Malaya.

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Abstract

This thesis is motivated by the limited research on the liquidity of Malaysian public listed firms, the growing number of liquidity horseraces, the recent data commercialization by Bursa Malaysia, and liquidity-enhancing policies being spearheaded mainly by stock exchange regulators in emerging markets. By assembling information that covers 1250 public listed non-financial firms over 2000–2015, the thesis conducts three empirical analyses on the determinants of firm liquidity and the effects of higher liquidity on firm valuation, where liquidity is proxied by the “Closing Percent Quoted Spreads” (CPQS). First, the thesis revisits the standard liquidity model and advocates the inclusion of shareholder base as a regressor. While conventional wisdom predicts more shareholders are associated with higher liquidity, the first empirical chapter hypothesizes a nonlinear relationship between the number of shareholders (NSH) and liquidity (CPQS) because the latter might deteriorate when shareholder base becomes too large. Using pooled ordinary least squares (OLS), the baseline results show that the natural logarithm of NSH and its squared terms are highly significant with opposite signs. This nonlinear U-shaped relationship passes the extensive robustness checks. Further analysis reveals that liquidity declines when NSH exceeds the threshold level due to higher volatility that is induced by noise trading. Second, the thesis proceeds to show why Malaysian public listed firms should pay attention to the liquidity of their stocks. While firm value premiums have been widely reported, the second empirical chapter hypothesizes a nonlinear liquidity-firm value relationship due to the dynamic interplays of the countervailing effects. Using pooled OLS to examine the effects of liquidity on firm value (proxied by Tobin’s Q), the baseline quadratic model reveals that CPQS and CPQS2 are statistically significant but their coefficients are of opposite signs. The nonlinear relationship between CPQS and Tobin’s Q passes subsequent robustness checks, implying that the firm value benefit can only be attained after firm liquidity surpasses the threshold level. Third, the thesis extends the liquidity-firm value literature by exploring new moderating variables. Political connections, foreign nominee ownership and local institutional ownership are three leading candidates, motivated by the entrenched culture of state patronage in Malaysian businesses, the higher efficiency of stocks with greater foreign nominee ownership and the Malaysian government’s mandate for state-backed local institutional funds to spearhead shareholder activism, respectively. The empirical results provide strong support for the moderating effects of political connections and foreign nominee ownership. However, the pooled OLS interaction variables for local institutional ownership are statistically insignificant, challenging the corporate governance channel that motivates the hypothesis of its moderating effect on liquidity-firm value relationship. In terms of policy implications, this thesis provides evidence that public listed firms in Malaysia should play a more active role in boosting their own stock liquidity since the tangible benefit of higher market valuation can only be attained when liquidity is at higher levels, especially for firms with political connections and higher foreign ownership. One effective way is through expanding the firms’ shareholder bases which at present are still far below the maximum threshold level.

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