Professional Documents
Culture Documents
Introduction
Investors tend to look at companies differently. They may favor some companies
over the others, and this is primarily caused by of a lot of factors. A helpful metric in
order to get a better idea of how investors view a company is by looking at the liquidity
of its stock in the market. According to Lucas (2018), liquidity is defined as the belief of
people that assets can be traded for cash on short notice, predictable terms, and
without undue labor costs. Not only do investors have different views about companies,
Since the inception of “investing”, investors have constantly searched for a better
way to determine whether they would get a decent return from their prospective
financial position of the company, the level of the competitiveness in the same sector,
and a thorough knowledge about the cost and profit centres within the firm”
(Mohammadi & Alek, 2012). The financial performance of a company can be evaluated
in different categories such as Efficiency, Profitability, and Solvency. Earnings are also
important since they are used as a summary measure of firm performance by a wide
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Investors tend to crunch a lot of information before deciding to invest in a
between the Stock Liquidity and Financial Performance in publicly listed companies in
Corporations need funds to execute their planned activities for the year or a
certain period to further improve their financial performance. However, funding can be
difficult to gain from normal operations only and they have to engage in financing
activities such as equity transactions. Stock volume and stock prices is a way to
publicly-listed companies to improve their financial performance if they have high stock
Stock liquidity is one of the most important factors of asset pricing. For instance,
investors will request higher premium for low liquidity securities, otherwise, they will
had and its stock prices on a given period or a time period. Stock volume transactions is
the measure of how many times the stocks of a given company are traded. Stock prices
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is the cost of a company’s stock to the shareholders if they purchased it or sold their
held shares.
Stock liquidity can be seen through bid-and-ask spread volume. The bid price is
the price of the stock the shareholder will be willing to buy, while the ask price is the
price of the stock the shareholder will be willing to sell. If the bid and ask price met on
The spread volume between the bid and ask price implies the volume of the
stock. If the spread volume between the bid and ask price is large, it implies for illiquidity
of the stock or low stock volume. If otherwise, it implies that the stock is liquid or has a
company operated on a given period or time period above or below market or industry
approaches.
this would give them whether the company is performing good or bad. Stakeholders
ways and methods that will cater their needs from the company as well as their next
decision.
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Issued financial statements of the company includes the Financial Position or Balance
Sheet, Income Statement and Cash Flow Statement. Each of the statement gives a
financial overview of the company for a given period and most of the time, it can also
Position gives the cumulative performance of a company from its assets, liabilities and
revenues, expenses or costs and its income or profit. Cash Flow Statement give the
also gives a reconciliation between the company’s profit and cash flow, and gives an
idea whether the company invest most of their cash in operations, investments or
financing.
The retail service or retailing is the set of business activities that adds value to the
products and services sold to consumers for their personal or family use. Retail service
not only includes the trade of goods or sale of produces in a store, it can also include
sale of services such as hotel services, doctors’ examination, haircuts, rentals or even
food deliveries. Retail service is a key component in the supply chain that connects the
manufacturers to the consumers. The supply chain is the set of firms that make and
manufacturers and sold in bulk to the wholesalers, then it will be purchased in bulk by
the retailers so that it can be sold in small amounts or quantities to the consumers. (Levi
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Retailers also provide assortment of products and goods to the consumers that enables
them to choose from a wide selection of products. They are also responsible for the bulk
breaking of products produced by manufacturers so that the consumers can buy the
goods in smaller and useful quantities. They also hold inventory for the manufacturers
so that when the consumers needed the products, a stock will be readily available for
them.
The biggest companies operating in the Philippines under the industry are Metro Retail
Stores Group, Inc., Philippine Seven Corporation, Puregold Price Club, Inc., Robinsons
Retail Holdings, Inc., SSI Group, Inc. and Wilcon Depot, Inc, which are involved in
Theoretical Framework
This study is designed to determine the relationship which governs stock liquidity
and the financial performance of firms engaged in retail service listed in the Philippine
Stock Exchange (PSE). The following theoretical basis were considered by the study:
agency theory, human uncertainty principle, Amivest model for liquidity, Tobin’s Q
theory of investment.
Agency Theory
parties in which one (agent) acts for or on behalf of the other (principal). The
theory of agency has been used widely as a basis for accounting research
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because modern companies have separated ownership interest and
management. The managers act as the agents of shareholders of the firm. The
theory posits that a problem arises when self-interest of the agents (managers)
does not coincide to the interest of the company and to its shareholders (Dalvi
and Baghi, 2014). The theory also hypothesizes that as managers try to
maximize their own benefit, they do so in the form of increased net profit,
improved return on investment, and a positive effect on the stock price since
al., 1387; Dalvi and Baghi, 2014). Thus, in agency theory, as managers
Soros. His framework explains the relationship between how an investor thinks
about a perceived reality and how such thinking affects reality itself. The principle
is separated into two propositions: fallibility and reflexivity. Fallibility states that
the view of a rational person will “never perfectly correspond to the actual state of
affairs.” Although people may gather information and knowledge, their analysis
of investors in an efficient market will influence the way they invest and their
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investments, in turn, will affect the nature of the market they invested in. The
human uncertainty principle, then, posits that rational investors will always base
their tradings on imperfect information; such information will lead them to believe
that some stocks are profitable and their investments upon such stocks may
increase its value which, in turn, will increase the volume of tradings on such
stocks.
Amivest model
stocks trading volume and its corresponding price. It determines the dollar
The total dollar volume is represented by the daily closing price of the stock and
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its daily share volume. The Amivest model is used because it only considers the
liquidity of individual stocks and not the market as a whole, which is accurate for
Tobin’s Q model
The Tobin’s Q model has been used by numerous studies as a proxy for
Tobin’s Q, to name a few), the “Q” represents the ratio of the market value of a
firm’s assets and its replacement cost. The model dictates that q ≥ 1 , must
always stand true in order for a firm to be considered profitable and a larger ratio
indicates better financial situation and a higher generation of cash. The Tobin’s Q
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Conceptual Framework
Figure 2. Conceptual framework of the relationship of stock liquidity and financial
performance of a company
retail-service sector from periods starting 2013 to 2017. The specific objectives of the
on the stock volume transactions and stock prices from the periods 2013
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(2) financial performance of respondent companies in the retail service sector
based on the financial statement issued for the periods starting 2013 to
The result of this study will be based on the financial statements issued on the
periods starting from 2013 to 2017 and information on the stock transaction volume and
the stock prices available from the Philippine Stock Exchange from 2013 to 2017 of the
● the period for the data will only cover the unaudited financial statements
issued for the quarterly periods from years 2013 to 2017 and financial
statements covering prior and after the mentioned periods are not
included,
● the data that will be gathered will only come from the financial statements
● the data will only come from the publicly-listed companies in the
will not include companies from the other sectors and sub-sectors,
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● the study will only include the publicly-listed companies registered and
and will not include companies that is not registered, operating and
● the study will not take into consideration the other factors, whether it is
financial performance.
The study could provide a measure or a benchmark for the top management of
how well their financial performance are given their stock liquidity through its stock
volume and stock price. Since, stock market fluctuations could not provide the
companies an ample basis on how it could affect their financial performance in each
period as certain macroeconomic factors and market variations can also affect their
equity. Through this study, the top management could determine how their financial
performance should be based on the industry given the change in their stock price as
The result of this study could help the top management employ devices that can
detect any deficiency that affects their financial performance arising from equity
transactions. The companies could then establish strategies that can help them secure
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The study could also help the shareholders determine if the stocks of the
company they own perform well financially partially because of their liquidity. The
shareholders can see if the stocks they own is worth the time being invested or another
The study could also help the creditors of the company to predict the financial
additional funding for them. The same is also true to creditors who have already lent
Lastly, this study could contribute to the scantly available literature on the
Definition of Terms
Financial Performance - measure of how well a firm can use assets from its
Liquidity - refers to how easy it is to buy and sell shares of a security without
Philippine Stock Exchange (PSE) - the only stock exchange in the Philippines.
(www.pse.com.ph)
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Philippine Stock Exchange index (PSEi) - the main index for PSE which is
Stock Price - quoted closing price of the stocks that can be found in the
Stock Transaction Volume - A stock's volume refers to the number of shares that are
Tobin’s Q Ratio - equals the market value of a company divided by its assets'
replacement cost, adjusted to reflect only the market value of the company’s
equity.
Volume - is a measure of how much of a given financial asset has been traded in
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Chapter 2
Foreign Literature
economic development (Ho & Odhiambo, 2015). This entails that in order for a country’s
economy to prosper, its stock market should be fundamentally sound enough to support
its growth. Hence, a need for the investing public to determine the right companies to
invest in. One important metric is to find out how liquid a company’s stock is.
Liquidity has been defined as the “‘ability to buy and sell large quantities of an
asset quickly and at a low cost” (Chordia, Sarkar & Subrahmanyam, 2003). Cooper,
Groth & Avera (1985) introduced a model that determines the amount of volume in the
trading of a stock that will result to 1% change in its price. The liquidity ratio emphasizes
the relationship between the trading volume and the price of a stock which is the two
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return on equity (ROE), earnings per share (EPS) and etc. Market-based
q, market value added (MVA), price-earnings ratio (PE), etc. According to Bo (1998),
one of the advantages of Tobin’s Q is that it explicitly considers future profitability, and
hence should account for the effect of uncertainty embedded in the future variables that
measure for financial performance since it can determine profitability without being
Tobin’s Q can be a reliable proxy for financial performance for a lot of today’s investors.
Furthermore, since the Tobin’s Q is reliant on the firm’s Market Value, and the market
value of a firm’s stock in the market is heavily influenced by its liquidity, it can be
inferred that stock liquidity can influence Tobin’s Q, a proxy for a company’s financial
performance
According to Fang, Noe, and Tice (2009), liquid stocks tend to have higher firm
market value. Stock liquidity is one of the most important factors of asset pricing. For
instance, investors will request higher premium for low liquidity securities, otherwise,
they will request for lower rate of return. (Cheng, 2017). They also have liquidity
premium, on that, highly liquid firms tend to have lower required rate of return and their
stocks could be traded at a premium. They also have high firm value ratios as they are
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which lowers the price impact of trades and boosts liquidity. In fact, according to
relationship between stock market liquidity and firm performance was also checked and
it was found that stock market liquidity was correlated with higher firm performance as
measured by Tobin Q. Dalvi and Baghi (2014) and Uno and Kamiyama (2010)
calculated stock market liquidity and firm performance relationship using the same
methodology and found that independent variables return, market to book value, zrlog.
index, log age depends on Tobin Q. Furthermore, Sidhu, (2016) conducted a research
with the aim of finding a relationship between stock market liquidity and firm value.
Control variables were used such as age and size of the firms that may affect the Q
ratio and results showed a positive relationship between the two main variables (stock
market liquidity and firm value) of the study. The study revealed that the value of the
focus on the firm's stock price performance and seek to determine how much
shareholders increase their wealth from one period to the next based on the dividends
they receive and the appreciation in the firm's stock price. Essentially, such
trading-based performance measures assess how well an investor would have done if
he or she had purchased a share of stock at the beginning of the period and sold it at
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the end. They added that an operating measure of current performance focuses solely
performance captures revisions in the market's beliefs about the firm's entire future
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Local Literature
liabilities, equity, income and expenses (including gains and losses), the contributions
by and distributions to owners in their capacity as owners, and the cash flows. The
amounts reported in the financial statements represents the book value of the line item
being considered. The book values are used in some of the models in the measurement
of the q ratio discussed previously. Valix also stated that financial performance is
composed of the company’s revenue, expenses and net income of loss for a given
Foreign Studies
Wyss, (2004), in his study, provided four aspects of liquidity: trading time,
tightness, depth, and resillency. Trading time is the “ability to execute a transaction
immediately at the prevailing price which can be measured by the number of trades in a
given time. Tightness is the “ability to buy and sell an asset at about the same price at
the same time. Different versions of spread (e.g. bid-ask spread and effective spread)
are used to measure the tightness of a security. Depth is the ability of an investor to buy
and sell assets “without influence on the quoted price”. The last aspect, resiliency,
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considers supply and demand and is the ability to buy and sell assets “with little
models used in the determination of the Q ratio for Canadian firms. The study
determined the appropriateness and the differences of the five models: (1) Simple q
Estimator, (2) Benchmark q Estimator, (3) Modified Lindenberg and Ross (LR) q
Estimator, (4) Hall’s q Estimator, and (5) Adjusted Hall’s q Estimator. The study showed
that the results generated by using the simple q estimator does not vary greatly with the
results obtained using the benchmark q estimator as well as the Lindenberg and Ross q
estimator. In addition, estimates using the Hall’s q estimator are significantly different
Local Studies
major stock market index which tracks the performance of the most representative
some macroeconomic economic factors such as exchange rate, money supply (M2), oil
prices, Gross Domestic Product (GDP), and Gross National Income (GNI). The study
identified a significant relationship between the macroeconomic factors and the PSEi. A
negative relationship is shown between the exchange rate the PSEi volatility.
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Nevertheless, the other macroeconomic factors enumerated previously depicted a
positive association with stock prices which in turn affect the market liquidity of such
stocks. This means that volatility of the PSEi may affect the liquidity of the stocks listed
market liquidity and a firm’s financial performance. Most of the research discussed
found a positive relationship between the two variables in their corresponding stock
markets. The difference in the method of measuring stock liquidity and financial
performance are also reviewed. From the related literatures discussed we have found
out that Tobin’s Q ratio is a reliable measure of financial performance because of its
investment decisions. Furthermore, we have found out that Amivest’s model for
determining a stock’s liquidity is also reliable as it considers both the volume and price
of a stock. Using Amivest’s model of determining a stock’s liquidity, and the Tobin’s Q
ratio as a proxy for the financial performance of a company, this study aims to
determine the relationship between the two variables. After collectively considering the
ideas and insights that we have accumulated from related studies and literatures, we
have inferred that the liquidity of a company’s stock is heavily associated to increases in
stock prices. They suggest that as stock prices increase, a firm’s market value, and
therefore its Tobin’s Q ratio which is a proxy for its financial performance, also
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increases. This particular inference is an important contribution to this study as it
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Chapter 3
RESEARCH METHODOLOGY
Research Design
stock liquidity of a publicly listed company to its financial performance in a given period.
The study aims to determine whether a positive or negative correlation exists between
the variables of the companies operating in the retail service industry. It is also
determined to identify if the correlation existed within the time period, from year 2013 to
2017.
The population for the study is the publicly listed companies under the retail sub
sector of the service sector industry, generated from the Philippine Stock Exchange
Electronic Disclosure Generation Technology or PSE EDGE. The generated list from
PSE EDGE included 6 publicly listed companies and their listing date:
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SSI Group, Inc. SSI November 7, 2014
The sampling size will not be restricted and companies that will qualify with the
criterion from the judgment sampling method will be classified and included in the
sampling size. Using the judgment sampling method, to be discussed further below, the
samples generated are the following companies: Philippine Seven Corporation (SEVN),
Puregold Price Club, Inc. (PGOLD), and Robinsons Retail Holdings, Inc. (RRHI).
Sampling Technique
The researchers used the purposive sampling in order to generate a sample size
of three (3) retail companies out of the six (6) publicly listed companies in PSE.
the sample that has a common characteristic and accurately fits the objectives of the
study. The sampling method is used due to the limited amount of retail companies listed
under the retail sub-sector of PSE. In addition, the method allows for sample selection
subject to a criteria:
● the company has been publicly listed for five years or longer;
● the company’s stock data and financial statements for 2013 to 2017 are
available.
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Data Gathering Procedure
The researchers will use secondary data for the study. The financial performance
measure will be gathered by using the issued financial statements of the companies.
The financial statements will be gathered through the official websites of the companies,
as well as through the online and offline services of Securities and Exchange
The data for stock liquidity will be gathered from daily transactions, stock prices
and volume, available from Philippine Stock Exchange using the PseAPI, a public data
(1) Tobin’s Q
The study will utilize the simple q formula provided by Sang, 1998:
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The simple Q ratio is used since the variables in the formula are available
Tobin’s Q information produced by the study will use information from quarterly
reports issued by the selected samples from 2013 to 2017. This will result to a
modification in the formula in which quarter-end market and book values will be
The study will refer to the stock liquidity measure introduced by Cooper,
between financial performance and stock liquidity, the researchers will use a
modified version of the Amivest Model in order to reflect a quarterly stock liquidity
information:
P q iV q i
Σ│%ΔP q i│
where P q i = quarterly closing price f or stock i
Σ│%ΔP q i│ = the sum of the absolute percentage of price changes f or stock i per quarter
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(3) Pearson’s Correlation Coefficient
or, in more detail, for a set of N two-dimensional data points [x1, x2, . . . , xN ] and [y1,
y2, . . . , yN ], we have:
According to Gogtay & Thatte (2017), the result of the correlation coefficient formula can
be interpreted as follows:
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APPENDICES
33
http://www.hep.ph.ic.ac.uk/~hallg/UG_2015/Pearsons.pdf
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https://www.researchgate.net/publication/307798152_Value_Relevance_of_Book_Valu
e_Earnings_Under_the_Local_GAAP_and_IFRS_Evidence_from_Turkey
https://www.researchgate.net/publication/316920642_The_Effect_Of_Earnings_Quality
_On_The_Predictbaility_Of_Accruals_And_Cash_Flow_Models_In_Forcasting_F
uture_Cash_Flows
http://www.sciencedirect.com/science/article/pii/0148619585900037.
https://www.idosi.org/aejsr/12(1)17/6.pdf
https://www.researchgate.net/publication/271065423_The_Measurements_of_Firm_Per
formance's_Dimensions
http://qu.edu.iq/repository/wp-content/uploads/2016/11/35-9.pdf
https://files.stlouisfed.org/files/htdocs/publications/review/2014/q3/lucas.pdf
https://www.vivianfang.org/uploads/2/3/2/7/23272078/fangetal2009.pdf
34
http://hrmars.com/hrmars_papers/Article_15_Evaluate_the_Relationship_between_Com
pany.pdf
http://verdi.unisg.ch/www/edis.nsf/SysLkpByIdentifier/2899/$FILE/dis2899.pdf
https://www.georgesoros.com/2014/01/13/fallibility-reflexivity-and-the-human-uncertaint
y-principle-2/
https://edisciplinas.usp.br/pluginfile.php/159813/mod_resource/content/1/Ross.pdf
https://www.academicjournals.org/journal/AJBM/article-full-text-pdf/3C299A530538
https://hrcak.srce.hr/file/116928
https://www.researchgate.net/publication/234035626_An_Empirical_Study_of_Financial
_Performance_Evaluation_of_a_Malaysian_Manufacturing_Company
http://verdi.unisg.ch/www/edis.nsf/SysLkpByIdentifier/2899/$FILE/dis2899.pdf
35
https://www.theseus.fi/bitstream/handle/10024/112381/Thesis%20.pdf?sequence=1
http://www.collectionscanada.gc.ca/obj/s4/f2/dsk2/ftp03/MQ39965.pdf
https://dirp4.pids.gov.ph/websitecms/CDN/PUBLICATIONS/pidspjd14-15_stockmarket.p
df?fbclid=IwAR1waqtdEm-_cE0gRf2qln5gZW1mdoYAqjHuzpgYW_EPztwmv_zzFugMm
OE
https://www.researchgate.net/publication/220278906_A_study_on_the_factors_affecting
_stock_liquidity
36