Stock Liquidity and Firm Value: The Mediating Role of Capital Structure

Abstract

Despite the substantial volume of research on the direct relationship between stock liquidity and firm value, no agreement has been reached on this nexus. This relationship may be influenced by some other intervening factors which have not been captured in the empirical studies. The present study aims to explore the link between stock liquidity and firm value and empirically tests the mediating role of capital structure on this relationship in the Indian context. Using sample data from 97 National Stock Exchange (NSE) listed top non-financial firms from 2010 to 2019 and adopting the Baron and Kenny approach, the results show that higher stock liquidity leads to a greater firm value. Furthermore, firms with liquid stocks are found to have significantly lower leverage. The results also confirm that capital structure fully mediates the relationship between stock liquidity and firm value. The empirical findings have important managerial implications when it comes to devising policies to maximise firms’ value.

Keywords

• stock liquidity
• firm value
• capital structure
• mediating role
• india