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The liquidity impact on firm values: The evidence of Taiwan's banking industry

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  • Chen, Ren-Raw
  • Yang, Tung-Hsiao
  • Yeh, Shih-Kuo

Abstract

Liquidity plays an important role in financial markets, especially during a financial crisis. New Basel III regulatory framework highlights the importance of liquidity risk management implemented by financial institutions. Moreover, updated International Financial Reporting Standards (IFRS) require the improvements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments. Using the liquidity discount model of Chen (2012), we are able to empirically classify Taiwan's financial institutions into three liquidity categories: safe, crisis contagious and vulnerable. Our findings can serve as an early warning signal for liquidity calamity. In addition, we investigate what factors affect firm-specific liquidity discounts for these institutions and conduct a sub-period analysis, which examines whether there is significant liquidity discounts changes before and after the 2008 financial crisis. We find that liquidity discounts change substantially during the financial crisis. Furthermore, we find that liquidity discounts can be attributed to some firm-specific performance.

Suggested Citation

  • Chen, Ren-Raw & Yang, Tung-Hsiao & Yeh, Shih-Kuo, 2017. "The liquidity impact on firm values: The evidence of Taiwan's banking industry," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 191-202.
    • Handle: RePEc:eee:jbfina:v:82:y:2017:i:c:p:191-202
    DOI: 10.1016/j.jbankfin.2016.07.003
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    References listed on IDEAS

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    3. Li, Zhe & Zhang, Wei-Guo & Liu, Yong-Jun, 2018. "European quanto option pricing in presence of liquidity risk," The North American Journal of Economics and Finance, Elsevier, vol. 45(C), pages 230-244.
    4. Gao, Rui & Li, Yaqiong & Lin, Lisha, 2019. "Bayesian statistical inference for European options with stock liquidity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 518(C), pages 312-322.

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    More about this item

    Keywords

    Financial institutions; Liquidity risk; Liquidity discount; Liquidity vulnerability;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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