A SURVEY OF THE RELATIONSHIP BETWEEN LIQUIDITY MEASURES AND ANNUAL STOCK RETURN IN TEHRAN STOCK EXCHANGE

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MEHRANI SASAN; RASAEIAN A.

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Journal: Journal of Accounting Advances Year:2009 | Volume:1 | Issue:1 (57/3) Page(s): 217-230

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Title

A SURVEY OF THE RELATIONSHIP BETWEEN LIQUIDITY MEASURES AND ANNUAL STOCK RETURN IN TEHRAN STOCK EXCHANGE

Author(s)

MEHRANI SASAN | RASAEIAN A. | Issue Writer Certificate

Keywords

ANNUAL STOCK RETURNQ3

LIQUIDITY MEASURESQ3

BID-ASK SPREADQ3

SHARE TURNOVERQ3

Abstract

Introduction: Dealers' decisions in capital markets are based on risk-return combination. Without attention to type and method of investment, two factors, investor prediction about recoverable earnings of investment and real profits of investment, are an important dimension of financial decision making. Many researches have examined the relationship between financial information and stock return. The conclusions of other researches account for the relationship between stock return and some non-financial information. LIQUIDITY MEASURES such as BID-ASK SPREAD, SHARE TURNOVER, rial trading volume, number of trades, and percentage of days that trades occur would have the relationship with firms' stock return. Most of the investors (with short run investment horizon) prefer liquid stocks than non liquid stocks. The purpose of liquidity is only a facility in buying and selling a given asset. Number of daily traded shares, number of daily traded firms, daily traded share value, and percentage of trading volume over total value of the market, number of buyers and number of buying are some measures of liquidity. Yang Hu (1997) tries to find a widely accessible measure of liquidity and studies its impact on asset pricing. Using trading turnover as a measure of liquidity and the 1976-1993 Tokyo Stock Exchange data, He finds that, cross sectionally, stocks with higher turnover tend to have a lower expected return. This evidence is consistent with predictions derived from an Amihud-Mendelson type of transaction cost model in which the turnover measures investors’ trading frequency. The trading frequency hypothesis also predicts that the cross-sectional expected return is a concave function of the turnover and the time-series expected return is an increasing function of the turnover. In an Amihud-Mendelson type of model, assets have different transaction costs and investors have different trading frequencies. Research Questions or hypothesis: The hypotheses of this research are as follows:1. There is a significant relationship between ANNUAL STOCK RETURN and BID-ASK SPREAD in Tehran Stock Exchange. 2. There is a significant relationship between ANNUAL STOCK RETURN and number of daily trades in Tehran Stock Exchange. 3. There is a significant relationship between ANNUAL STOCK RETURN and percentage of the days that trades occur in Tehran Stock Exchange. 4. There is a significant relationship between ANNUAL STOCK RETURN and rial trading volume in Tehran Stock Exchange. 5. There is a significant relationship between ANNUAL STOCK RETURN and daily trading turnover in Tehran Stock Exchange.Methods: This research is of descriptive-correlative type. The simple regression method is used to examine the hypotheses. We use panel data regression to examine the hypotheses. All models are examined at the 0.05 level or better. All the examinations for the total independent variables are performed separately but the conclusions are represented totally in the table.Measuring the variables: ANNUAL STOCK RETURN: ANNUAL STOCK RETURN is the difference between share price at the end of the period and share price at the beginning of the period plus other proceeds of buying share such as: benefits of preemptive right, stock dividend, and dividend payouts over stock price at the beginning of the period. Kt= (-P t – P t-1 ) +D t+ (p t – p n ) *N c /N t +N e *P 1 /N t )/P t-1Where: Kt= Total stock return relative to first price Pt=Stock price at the end of the year Pt-1=Stock price at the beginning of the year Pn=Par value of stock Dt=Gross dividend payout Ne=Number of increased shares by unexpended appropriation or retained earnings Nc=Number of increased shares by contributions Nt=Number of shares before increasing capital Relative BID-ASK SPREAD (BA): BID-ASK SPREAD that is used in this research calculated by following formula that has been used by Amihud and Mendelson (1986) and is as follows:BAi=AP-BP/AP+BP/2i=the examined sampleBA=Average of daily Relative BID-ASK SPREADsAP=the best ask price for firm (i) per dayBP=the best bid price for firm (i) per dayercentage of days that trades occur (PDT): Number of days that occurs at least one trade over total trading days in the period Daily trading turnover (DTU): Average of daily trading volume over weighted average of number of outstanding sharesRial trading volume for per day (RTV): Average of daily rial trading volume in the periodFinancial information of the firms that are listed on Tehran Stock Exchange (TSE) extracted of financial reporting, week books and yearbooks of TSE and COMPUSTAT data for stocks listed on Tehran Stock Exchange. 156 sample firms for a six years period are selected. These firms were selected with attention to the following measures:1-The required financial and non-financial information of the firms should be available. 2-The firms shouldn’t change their financial year during sample period. 3-The firms shouldn’t have cessation of operations4-Number of trades of the firms shouldn’t be fewer than 100 times in the year. 5-Investing firms eliminated of the sample firms. We used of panel data regression to examine the hypotheses. We examine the hypotheses by panel data regressions for the period thorough 1381-1386. The models of the research are as follows: SRE=b0 +b1X i +e H 0: b1 =0 H 1: b1 ¹ 0WhereSRE is dependent variables and is the independent variable includes BA, NDT, PDT, RTV, and DTU, and b0 is the intercept terms, If H0 is rejected, H1 will be accepted. Accepting H1 accounts for a significant relationship between SRE and given independent variable that is used in the test.Results: The selected approach to examine the hypotheses is panel data regression. The conclusions of panel data regression for the period 1381-1386 indicate that there is no important significant relationship between ANNUAL STOCK RETURN and LIQUIDITY MEASURES. BID-ASK SPREAD as an important measure of LIQUIDITY MEASURES has negative and insignificant relationship with ANNUAL STOCK RETURN.Discussion and Conclusion: Findings of panel data regressions for the period 1381-1386 indicate that there are no significant relationships between ANNUAL STOCK RETURN and independent variables. BID-ASK SPREAD that in many researches is an important measure of liquidity, in this research has no significant relationship with ANNUAL STOCK RETURN. Petersen and Fialkowski (1994) find that less than 50% of trades on the NYSE actually occurs at the quoted bid or ask. Yang Hu (1997) indicates that the commonly used quoted spread data does not measure the actual transaction cost (Hu, 1997). Taking into account the price change after the trade, Huang and Stoll (1996) estimate the correlation between the realized spread and the quoted spread is insignificant. The results of this research like that of Yang Hu (1997) indicate that LIQUIDITY MEASURES are not suitable determinants for stock return.

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APA: Copy

MEHRANI, SASAN, & RASAEIAN, A.. (2009). A SURVEY OF THE RELATIONSHIP BETWEEN LIQUIDITY MEASURES AND ANNUAL STOCK RETURN IN TEHRAN STOCK EXCHANGE. JOURNAL OF ACCOUNTING ADVANCES (JAA) (JOURNAL OF SOCIAL SCIENCES AND HUMANITIES), 1(1 (57/3)), 217-230. SID. https://sid.ir/paper/160428/en

Vancouver: Copy

MEHRANI SASAN, RASAEIAN A.. A SURVEY OF THE RELATIONSHIP BETWEEN LIQUIDITY MEASURES AND ANNUAL STOCK RETURN IN TEHRAN STOCK EXCHANGE. JOURNAL OF ACCOUNTING ADVANCES (JAA) (JOURNAL OF SOCIAL SCIENCES AND HUMANITIES)[Internet]. 2009;1(1 (57/3)):217-230. Available from: https://sid.ir/paper/160428/en

IEEE: Copy

SASAN MEHRANI, and A. RASAEIAN, “A SURVEY OF THE RELATIONSHIP BETWEEN LIQUIDITY MEASURES AND ANNUAL STOCK RETURN IN TEHRAN STOCK EXCHANGE,” JOURNAL OF ACCOUNTING ADVANCES (JAA) (JOURNAL OF SOCIAL SCIENCES AND HUMANITIES), vol. 1, no. 1 (57/3), pp. 217–230, 2009, [Online]. Available: https://sid.ir/paper/160428/en

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