Stock Market Liquidity and Accounting Variables
Posted: 25 Nov 2011
Date Written: November 24, 2011
Financial objective of each and every firm is laid on the maximization of the shareholders’ wealth and is expected to determine the market value of the firm’s share prices, which is affected by all types of information. Accounting information disclosed by the firm is one of the most important information sources for investors while valuing a firm. It is capable of revealing a picture of firm’s operating, financial and business risks. A study conducted by Ball and Brown (1969) has supported the view by confirming that 35 to 40 percent of cross sectional variability of systematic risk can be explained by the co-movement in the accounting income of the firms.
The linkage between accounting variables and stock market return continues to be an ongoing research activity. It is a generally agreed phenomenon that the accounting information affects the share price to a larger extent. Efficient market hypothesis comes out of the view that a stock market is quite efficient enough if the prices fully reflect all information. It appears that the relationship between some accounting variables and market risk-return trade-offs are well established in the financial literature but whether there exists any association between stock and market liquidity and accounting variables or not is yet to be investigated.
The present study is an attempt to trace out any empirical relationship between five arbitrarily selected accounting variables with stock market liquidity at firm level using cross-sectional data of 80 Indian companies.
Keywords: Stock Market, Accounting Information, Liquidity, Risk-return
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