The Determinants of Securities Trading Activity: Evidence from Four European Equity Markets

Abstract

Purpose

The main objective of this study is to obtain new empirical evidence about the connections between equity trading activity and five possible liquidity determinants: market capitalisation, dividend yield, earnings yield, company growth, and the distinction between recently-listed firms as opposed to more established ones.

Design / Methodology / Approach

We use a sample of 172 stocks from four European markets and estimate models using the entire sample data and different sub-samples to check the relative importance of the above determinants. We also conduct a factor analysis to re-classify the variables into a more succinct framework.

Findings

The evidence suggests that market capitalisation is the most important trading activity determinant, and the number of years listed ranks thereafter.

Research limitations / implications

The positive relation between trading activity and market capitalisation is in line with prior literature, while the findings relating to the other determinants offer further empirical evidence which is a worthy addition in view of the contradictory results in prior research.

Practical implications

This study is of relevance to practitioners who would like to understand the cross-sectional variation in stock liquidity at a more detailed level.

Originality / value

The originality of the paper rests on two important grounds: (a) we focus on trading turnover rather than on other liquidity proxies, since the former is accepted as an important determinant of the liquidity generation process, and (b) we adopt a rigorous approach towards checking the robustness of the results by considering various sub-sample configurations.

Keywords: Dividend yield, European equity markets, Factor analysis, Liquidity, Liquidity determinants, Market capitalisation, Newly established firms, Securities markets, Trading activity

JEL Classification: G10, G12, G15