Index Revisions, Stock Liquidity and the Cost of Equity Capital

Abstract

This study examines the stock liquidity and cost of equity capital (COEC) effects around the CNX Nifty index revisions during the period 1998–2011. To examine these effects, the inclusion (exclusion) firms are compared with their matching peers. The stock liquidity effect has been examined by using distinct liquidity measures, such as trading volume, turnover rate and illiquidity ratio. The COEC effect has been examined with the help of cost of equity, stock liquidity, firm size, leverage and inclusion (exclusion) dummies. It was found that the stocks included to the CNX NIFTY were less liquid than their matching peers were, whereas the stocks excluded were experiencing more liquidity than their matching peers. Further, the study finds an increase in the COEC for the included firms and a decrease in the COEC for the excluded firms.

Leverage and firm performance: Empirical evidence from Indian food processing industry

“…Similarly, Rahman and Rajib (2017) studied index revisions and firm performance and found a negative relation between firm performance and leverage. In another study by Rahman and Rajib (2018) examining index revisions and cost of equity capital found negative relation between leverage and cost of equity. There has been a considerable volume of academic papers and studies, both in the developed economies, advanced developing economies and developing economies on the impact of leverage on firms' performance and research is still going on to incorporate the existing theories.…”

How Does Gender Diversity Moderate the Relationship between Income Smoothing and Stock Liquidity? Evidence from Egypt

“…Additionally, SL enables firms to attract more investments, raise their funds by issuing new stocks, and diminish their capital costs (Al-Jaifi, 2017; Khan et al, 2022). Prior studies proved the implications of SL in many aspects such as firms' dividends (e.g., Michaely and Qian, 2022;Stereńczak and Kubiak, 2022), cash holdings (e.g., Nyborg and Wang, 2021;Im et al, 2022), firm's value (e.g., Jawed and Kotha, 2022;Shamsic et al, 2022), capital structure (e.g., Dang et al, 2019;Dutta et al, 2022), corporate diversification (e.g., Gu et al, 2018), cost of capital (e.g., Amihud et al, 2015;Rahman and Rajib, 2018), and firms' performance (e.g., Boloupremo, 2020;Chabachib et al, 2020). As a consequence, SL is a crucial area of interest whether in the field of stock markets or the field of firms.…”