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Does Corporate Policy Risk Affect Stock Liquidity? Panel Data Evidence from Listed Companies in a Major Emerging Market

Author

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  • Asis Kumar Sahu

    (Department of Economics & Finance, BITS Pilani, Pilani-Campus, Rajasthan 333031, India)

  • Byomakesh Debata

    (Department of Economics & Finance, BITS Pilani, Pilani-Campus, Rajasthan 333031, India)

  • Ştefan Cristian Gherghina

    (Department of Finance, Bucharest University of Economic Studies, 6 Piata Romana, 010374 Bucharest, Romania)

Abstract

This study examines the impact of firms’ overall corporate policy risk on stock liquidity. This study constructs a novel overall corporate policies risk index (PRI) for firms by capturing risk embedded in managers’ different policy decisions, such as investment, financing, diversification, and cash management, by weighting each policy risk through the regression decomposition method. Using a large sample of 466 India-listed firms from the financial year 2003–2004 to 2022–2023, this study finds that there is a negative association between PRI and stock liquidity. The study further explores the information environment heterogeneity and finds that the adverse impact of a PRI is a more prominent firm that is hard to value or in a less transparent environment as compared to the transparent firms. Moreover, the adverse impact of PRI on stock liquidity is significantly more pronounced during financial crises, while its effect is less substantial during non-crisis periods. The robustness of these results is confirmed even after addressing endogeneity issues using various techniques, such as propensity score matching (PSM), two-stage least squares instrumental variable approach (2 SLS IV), and the system-generalized method of moments (System GMM).

Suggested Citation

  • Asis Kumar Sahu & Byomakesh Debata & Ştefan Cristian Gherghina, 2025. "Does Corporate Policy Risk Affect Stock Liquidity? Panel Data Evidence from Listed Companies in a Major Emerging Market," Economies, MDPI, vol. 13(2), pages 1-27, January.
    • Handle: RePEc:gam:jecomi:v:13:y:2025:i:2:p:30-:d:1579247
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    References listed on IDEAS

    as
    1. Asis Kumar Sahu & Byomakesh Debata & Saumya Ranjan Dash, 2024. "Manager sentiment, policy uncertainty, ESG disclosure and firm performance: a large language model in corporate landscape," International Journal of Accounting & Information Management, Emerald Group Publishing Limited, vol. 32(5), pages 858-882, July.
    2. Kose John & Lubomir Litov & Bernard Yeung, 2008. "Corporate Governance and Risk‐Taking," Journal of Finance, American Finance Association, vol. 63(4), pages 1679-1728, August.
    3. Korkeamäki, Timo & Liljeblom, Eva & Pasternack, Daniel, 2017. "CEO power and matching leverage preferences," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 19-30.
    4. Kim, Karam & Ryu, Doojin & Yang, Heejin, 2021. "Information uncertainty, investor sentiment, and analyst reports," International Review of Financial Analysis, Elsevier, vol. 77(C).
    5. David Roodman, 2009. "How to do xtabond2: An introduction to difference and system GMM in Stata," Stata Journal, StataCorp LP, vol. 9(1), pages 86-136, March.
    6. Lu, Chia-Wu & Chen, Tsung-Kang & Liao, Hsien-Hsing, 2010. "Information uncertainty, information asymmetry and corporate bond yield spreads," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2265-2279, September.
    7. Jiaqi Jiang & Yun Feng, 2021. "The interaction of risk management tools: Financial hedging, corporate diversification and liquidity," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2396-2413, April.
    8. Tarun Chordia, 2005. "An Empirical Analysis of Stock and Bond Market Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 85-129.
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