Equity Liquidity and Firm Investment: Evidence from Pakistan

  • Abdul Rashid International Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan
  • Maria Karim International Institute of Islamic Economics (IIIE), International Islamic University (IIU), Islamabad, Pakistan
Keywords: Stock Liquidity, Firm Investment, Non-Financial Firms, Fixed Effects, Hausman Specification Test, Pakistan


This paper examines how equity liquidity affects firms’ investment decisions. We use an unbalanced panel data for a sample of 360 non-financial firms of Pakistan for the period 2001-2016. We apply the Hausman specification test to identify whether fixed or random effects model is appropriate. Using two alternative measures of equity liquidity, we find that equity liquidity has a significant positive impact on firms’ investment decisions. We also show that several firm-specific factors are significant in determining firms’ investment policy. The findings of the paper have significant implications for both policymakers and firm managers. Our results support the liquidity premium hypothesis.


Download data is not yet available.

Article Analytics Summary


Amihud, Y. (2002). Illiquidity and Stock Returns: Cross-Section and Time-Series Effects. Journal of Financial Markets, 5(1), 31-56. DOI: https://doi.org/10.1016/S1386-4181(01)00024-6

Amihud, Y. & Mendelson, H. (1988). Liquidity and Asset Prices: Financial Management Implications. Financial Management, 17, 5-15. DOI: https://doi.org/10.2307/3665910

Amihud, Y., & Mendelson, H. (1986). Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, 17(2), 223-249. DOI: https://doi.org/10.1016/0304-405X(86)90065-6

Amihud, Y., & Mendelson, H. (1989). The Effects of Beta, Bid-Ask Spread, Residual Risk, and Size on Stock Returns. Journal of Finance, 44 (2), 479-86. DOI: https://doi.org/10.1111/j.1540-6261.1989.tb05067.x

Arian, O.,Galdipur, S. & Kiamehr J. (2014). Impact of Stock Market Liquidity on Firm Value. Journal of Educational and Management Studies, 4(4), 782-786.

Asquith, P., & Mullins, D.W. (1986). Equity Issues and Offering Dilution. Journal of Financial Economics, 15(1-2), 61-89. DOI: https://doi.org/10.1016/0304-405X(86)90050-4

Baker, M., & Wurgler, J. (2002). Market Timing and Capital Structure. Journal of Finance, 57(1), 1-32. DOI: https://doi.org/10.1111/1540-6261.00414

Beck, T. & Levine, R. (2004). Stock Markets, Banks, and Growth: Panel Evidence. Journal of Banking & Finance, 28(3), 423-442. DOI: https://doi.org/10.1016/S0378-4266(02)00408-9

Becker-Blease, J. R. & Paul, D. L. (2006). Stock Liquidity and Investment Opportunities: Evidence from Index Additions. Financial Management, 35(3), 35-51. DOI: https://doi.org/10.1111/j.1755-053X.2006.tb00146.x

Butler, A. W., Grullon, G., & Weston, J. P. (2005). Stock Market Liquidity and the Cost of Issuing Equity. Journal of Financial and Quantitative Analysis, 40(2), 331-348. DOI: https://doi.org/10.1017/S0022109000002337

Cheung, W., Fung, S., & Chung, R. (2015). The Effects of Stock Liquidity on Firm Value and Corporate Governance: Endogeneity and the REIT Experiment. Journal of Corporate Finance, 35(12), 211- 231. DOI: https://doi.org/10.1016/j.jcorpfin.2015.09.001

Choi, W. G. & Cook, D. (2006). Stock Market Liquidity and the Macroeconomy: Evidence from Japan. In Monetary Policy under Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15.

Chordia, T., Subrahmanyam, A., & Anshuman, V. R. (2001). Trading Activity and Expected Stock Returns. Journal of Financial Economics, 59(1), 3-32. DOI: https://doi.org/10.1016/S0304-405X(00)00080-5

Chung, K.H., Elder, J., and Kim, J. C. (2010). Corporate Governance and Liquidity. Journal of Financial and Quantitative Analysis, (45), 265-291. DOI: https://doi.org/10.1017/S0022109010000104

Corwin, S. A. (2003). The Determinants of Underpricing for Seasoned Equity Offerings. Journal of Finance, 58(5), 2249-2279. DOI: https://doi.org/10.1111/1540-6261.00604

Dalvi, M. R. & Baghi, E. (2014). Evaluate the Relationship between Company Performance and Stock Market Liquidity. International Journal of Academic Research in Accounting, Finance, and Management Sciences, 4(1), 136-144. DOI: https://doi.org/10.6007/IJARAFMS/v4-i1/550

Devereux, M. & Schiantarelli, F. (1989). Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data. Asymmetric Information, Corporate Finance, and Investment, National Bureau of Economic Research, Inc.279-306.

Devereux, M. & Schiantarelli, F. (1990). Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data. Asymmetric Information, Corporate Finance, and Investment, National Bureau of Economic Research, Inc. DOI: https://doi.org/10.3386/w3116

Diamond, W. D. & Verrecchia, R. E. (1981). Information Aggregation in a Noisy Rational Expectations Economy. Journal of Financial Economics, 9(3), 221-235. DOI: https://doi.org/10.1016/0304-405X(81)90026-X

Dittmar, A. & Thakor, A. (2007). Why Do Firms Issue Equity? Journal of Finance, 62(1), 1-54. DOI: https://doi.org/10.1111/j.1540-6261.2007.01200.x

Doku, J. N., Adjasi, C. K. D. & Kumankuma, E. S. (2011). Financial Market Development and Capital Structure of Listed Firms-Empirical Evidence from Ghana. Serbian Journal of Management, 6(2), 155-168. DOI: https://doi.org/10.5937/sjm1102155D

Easley, D. & O’hara, M. (2004). Information and the Cost of Capital. Journal of Finance, 59(4), 1553-1583. DOI: https://doi.org/10.1111/j.1540-6261.2004.00672.x

Fan, J., Titman, S. & Twite, G. (2010). An International Comparison of Capital Structure and Debt Maturity Choices. NBER Working paper, No. 16445. DOI: https://doi.org/10.3386/w16445

Fang, V. W., Noe, T. H. & Tice, S. (2009). Stock Market Liquidity and Firm Value. Journal of Financial Economics, 94(1), 150-169. DOI: https://doi.org/10.1016/j.jfineco.2008.08.007

Fang, V.W., Tian, X., & Tice, S. (2014). Does Stock Liquidity Enhance or Impede Firm Innovation? Journal of Finance, 69(5),2085-2125. DOI: https://doi.org/10.1111/jofi.12187

Frieder, L., & Martell, R. (2006). On Capital Structure and the Liquidity of a Firm's Stock. Working Paper, Purdue University. DOI: https://doi.org/10.2139/ssrn.880421

Gebauer, S., Setzer, R., & Westphal, A. (2017). Corporate Debt and Investment: A Firm Level Analysis for Stressed Euro Area Countries. ECB Working Paper Series, 2101. DOI: https://doi.org/10.2139/ssrn.3036818

Grimaud, A. F. & Gromb, D. (2004). Public Trading and Private Incentives. Review of Financial Studies, 17(4), 985–1014. DOI: https://doi.org/10.1093/rfs/hhh002

Guariglia, A. (2008). Internal Financial Constraints, External Financial Constraints, and Investment Choice: Evidence from a Panel of UK Firms. Journal of Banking & Finance, 32(9), 1795-1809. DOI: https://doi.org/10.1016/j.jbankfin.2007.12.008

Ha, D. T. & Vinh V. X. (2017). Stock Market Liquidity and Firm Investment: Evidence from Vietnam. Journal of International Business and Economics, 5(1), Abstract 6. DOI: https://doi.org/10.15640/jibe.v5n1a6

Hansen, G. S. & Wernerfelt, B. (1989). Determinants of Firm Performance: The Relative Importance of Economic and Organizational Factors. Strategic Management Journal, 10(5), 399-411. DOI: https://doi.org/10.1002/smj.4250100502

Haugen, R. A., & Baker, N. L. (1996). Commonality in the Determinants of Expected Stock Returns. Journal of Financial Economics, 41(3), 401-439. DOI: https://doi.org/10.1016/0304-405X(95)00868-F

Hennessy, C. A., & Whited, T. M. (2005). Debt Dynamics. Journal of Finance, 60(3), 1129-1165. DOI: https://doi.org/10.1111/j.1540-6261.2005.00758.x

Holmstrom, B. & Tirole, J. (1993). Market Liquidity and Performance Monitoring. Journal of Political Economy, 101(4), 678-709. DOI: https://doi.org/10.1086/261893

Hovakimian, A., Hovakimian, G., & Tehranian, H. (2004). Determinants of Target Capital Structure: The Case of Dual Debt and Equity Issues. Journal of Financial Economics, 71(3), 517-540. DOI: https://doi.org/10.1016/S0304-405X(03)00181-8

Jung, K., Kim, Y.C., & Stulz, R. (1996). Timing, Investment Opportunities, Managerial Discretion, and the Security Issue Decision. Journal of Financial Economics, 42(2), 159-185. DOI: https://doi.org/10.1016/0304-405X(96)00881-1

Kahn, M. C. & Winton, A. (1998). Ownership Structure, Speculation, and Shareholder Intervention. Journal of Finance, 53(1), 99-129. DOI: https://doi.org/10.1111/0022-1082.45483

Kang, M., Wang, W., & Eom, C. (2017). Corporate Investment and Stock Liquidity: Evidence on the Price Impact of Trade. Review of Financial Economics, 33(1), 1-11. DOI: https://doi.org/10.1016/j.rfe.2017.02.001

Kim, S.-H. & Lee, K.-H. (2014). Pricing of Liquidity Risk: Evidence from Multiple Liquidity Measures. Journal of Financial Economics, 25(1), 112-133. DOI: https://doi.org/10.1016/j.jempfin.2013.11.008

Knez, P. J. & Ready, M. J. (1996). Estimating the Profits from Trading Strategies. Review Financial Studies, 9(4), 1121–1163. DOI: https://doi.org/10.1093/rfs/9.4.1121

Kyle, A. & Vila, J. (1991). Noise Trading and Takeovers. RAND Journal of Economics, 22(1), 54-71. DOI: https://doi.org/10.2307/2601007

Lipson, M. L., & Mortal, S. (2009). Liquidity and Capital Structure. Journal of Financial Markets, 12(4), 611-644. DOI: https://doi.org/10.1016/j.finmar.2009.04.002

Maug, E. (1998). Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control? Journal of Finance, 53(1), 65-98. DOI: https://doi.org/10.1111/0022-1082.35053

Mikkelson, W.H. & Partch, M. M. (1986) “Valuation effects of security offerings and the issuance process” Journal of Financial Economics, 15(1-2), 31-60. DOI: https://doi.org/10.1016/0304-405X(86)90049-8

Mirza, S. A. & Javed, A. (2013). Determinants of Financial Performance of a Firm: Case of Pakistani Stock Market. Journal of Economics and International Finance, 5(2), 43-52. DOI: https://doi.org/10.5897/JEIF12.043

Noe, T.H. (2002). Investor Activism and Financial Market Structure. Review of Financial Studies, 15(1), 289-318. DOI: https://doi.org/10.1093/rfs/15.1.289

Notta, A. & Vlachei, A. (2014). The Impact of Financial Crisis on Firm Performance in Case of Greek Food Manufacturing Firms. Procedia Economics and Finance, 14, 454-460. DOI: https://doi.org/10.1016/S2212-5671(14)00734-5

Ogawa, K. (2013). Firm Investment, Liquidity and Bank Health: A Panel Study of Asian Firms in the 2000s. ADB Economics Working Paper Series, 338. DOI: https://doi.org/10.2139/ssrn.2222381

Pástor, L. & Stambaugh, R. F. (2003). Liquidity Risk and Expected Stock Returns. Journal of Political Economy, 111(3), 642-685. DOI: https://doi.org/10.1086/374184

Reddy, K., Locke, S. M., & Scrimgeour, F. (2010). The Efficacy of Principle‐based Corporate Governance Practices and Firm Financial Performance: An Empirical Investigation. International Journal of Managerial Finance, 6(3), 190-219. DOI: https://doi.org/10.1108/17439131011056224

Sharma, P. & Carney, M. (2012). Value Creation and Performance in Private Family Firms: Measurement and Methodology Issues. Family Business Review, 25(3), 233-242. DOI: https://doi.org/10.1177/0894486512457295

Sikarwar, T. S., Gupta, M., & Sharma, A. (2015). Stock Market Liquidity and Firm Performance. Accounting, 1, 29-36. DOI: https://doi.org/10.5267/j.ac.2015.11.003

Soumaya, H. (2012). The Effect of Debt, Firm Size, and Liquidity on Investment-Cash Flow Sensitivity. International Journal of Accounting and Financial Reporting, 2(2), 2162-3082.

Soumaya, H. (2012). The Effect of Debt, Firm Size, and Liquidity on Investment-Cash Flow Sensitivity. International Journal of Accounting and Financial Reporting, 2(2), 1-15. DOI: https://doi.org/10.5296/ijafr.v2i2.2064

Stewart, C. M. (1977). Determinants of Corporate Borrowing. Journal of Financial Economics, 5(2), 147-175. DOI: https://doi.org/10.1016/0304-405X(77)90015-0

Stulz, R. M., Vagias, D., & Van Dijk, M. A. (2013). Do Firms Issue more Equity when Markets are more Liquid? National Bureau of Economic Research, No. w19229. DOI: https://doi.org/10.3386/w19229

Submitter, N. & Anderson, R. W. (2002). Capital Structure, Firm Liquidity and Growth. National Bank of Belgium Working Paper No. 27. DOI: https://doi.org/10.2139/ssrn.1691996

Udomsirikul, P., Jumreornvong, S., & Jiraporn, P. (2011). Liquidity and Capital Structure: The Case of Thailand. Journal of Multinational Financial Management, 21(2), 106-117. DOI: https://doi.org/10.1016/j.mulfin.2010.12.008

Xiong, J. (2016). Stock Liquidity and Firm Investment —Evidence from Chinese Listed Companies. Journal of Business Theory and Practice, 4(1), 2329-2644. DOI: https://doi.org/10.22158/jbtp.v4n1p25

Zhang, L., Li, Y., Huang, Z. & Chen, X. (2017). Stock Liquidity and Firm Value: Evidence from China. Applied Economics Letters, 25(1), 1-4. DOI: https://doi.org/10.1080/13504851.2017.1293779

How to Cite
Rashid, A., & Karim, M. (2018). Equity Liquidity and Firm Investment: Evidence from Pakistan. Journal of Accounting and Finance in Emerging Economies, 4(2), 111-122. https://doi.org/10.26710/jafee.v4i2.523