Impact of Financial Reporting Quality on Liquidity Synchronization: Evidence from BRICS Countries
DOI:
https://doi.org/10.65072/jeid.v1i1.1Keywords:
financial reporting quality, liquidity synchronization, market microstructure, FMOLS techniquesAbstract
The main objective of the current study is to examine the relationship between financial reporting quality and liquidity synchronization within the BRICS countries. The BRICS countries include Brazil, Russia, India, China, and South Africa. When firms maintain high financial reporting quality, transparency improves, information asymmetry decreases, market efficiency increases, and ultimately both firm-level liquidity and overall market performance improve. This study uses panel data from 2012 to 2023, covering publicly listed firms in the BRICS countries. The Fully Modified Ordinary Least Squares (FMOLS) technique is employed to examine the relationship between financial reporting quality and liquidity synchronization. Liquidity synchronization refers to the extent to which an individual stock moves in tandem with overall market movements. Financial reporting quality is measured using accrual-based and earnings quality measures. The results indicate that firms with higher financial reporting quality exhibit lower liquidity synchronization. This suggests that firm-specific information is incorporated into prices more efficiently, thereby reducing the co-movement of individual stocks with the broader market. This study contributes to the literature by linking financial reporting quality to market microstructure in emerging economies. It also provides valuable implications for policymakers, regulators, and investors to enhance market stability and efficiency within the BRICS countries.
References
Adrian, T., & Shin, H. S. (2010). Liquidity and leverage. Journal of Financial Intermediation, 19(3), 418–437. https://doi.org/10.1016/j.jfi.2008.12.002
Aikman, D., Alessandri, P., Eklund, B., Gai, P., Kapadia, S., Martin, E., Mora, N., Sterne, G., & Willison, M. (2011). Funding liquidity risk in a quantitative model of systemic stability. In R. Alfaro (Ed.), Financial stability, monetary policy, and central banking (Vol. 15, pp. 371–410). Central Bank of Chile.
Amihud, Y. (2002). Illiquidity and stock returns: Cross section and time series effects. Journal of Financial Markets, 5, 31–56. https://doi.org/10.1016/j.qref.2005.08.002
Amihud, Y., & Mendelson, H. (1989). The effects of beta, bid–ask spread, residual risk, and size on stock returns. Journal of Finance, 44, 479–486. https://doi.org/10.1111/j.1540-6261.1989.tb05067.x
Anthony, J., Docherty, P., Lee, D., & Shamsuddin, A. (2017). Liquidity commonality in the secondary corporate loan market. Economics Letters, 161, 10–14. https://doi.org/10.1016/j.econlet.2017.09.016
Baker, M., & Stein, J. C. (2004). Market liquidity as a sentiment indicator. Journal of Financial Markets, 7(3), 271–299. https://doi.org/10.1016/j.finmar.2004.05.001
Ball, R., Kothari, S., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of Accounting and Economics, 29(1), 1–52. https://doi.org/10.1111/j.1911-3846.2011.01071.x
Beber, A., Brandt, M. W., & Kavajecz, K. A. (2009). Flight-to-quality or flight-to-liquidity? Evidence from the Euro-area bond market. Review of Financial Studies, 22(3), 925–957. https://doi.org/10.1093/rfs/hhn104
Benos, E., Payne, R., & Vasios, M. (2020). Centralized trading, transparency, and interest rate swap market liquidity: Evidence from the implementation of the Dodd–Frank Act. Journal of Financial and Quantitative Analysis, 55(1), 159–192. https://doi.org/10.1017/S0022109018001242
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2–3), 112–131. https://doi.org/10.1016/j.jacceco.2009.09.001
Brennan, M. J., & Subrahmanyam, A. (1996). Market microstructure and asset pricing: On the compensation for illiquidity in stock returns. Journal of Financial Economics, 41, 441–464. https://doi.org/10.1016/0304-405X(95)00870-K
Brockman, P., Chung, D. Y., & Pérignon, C. (2009). Commonality in liquidity: A global perspective. Journal of Financial and Quantitative Analysis, 44(4), 851–882. https://doi.org/10.1186/s40929-017-0016-9
Brunnermeier, M. K., & Pedersen, L. H. (2009). Market liquidity and funding liquidity. Review of Financial Studies, 22(6), 2201–2238. https://doi.org/10.1093/rfs/hhn098
Buis, B., Pieterse-Bloem, M., Verschoor, W. F., & Zwinkels, R. C. (2020). Expected issuance fees and market liquidity. Journal of Financial Markets, 48, 100514. https://doi.org/10.1016/j.finmar.2019.100514
Cespa, G., & Foucault, T. (2014). Illiquidity contagion and liquidity crashes. Review of Financial Studies, 27(6), 1615–1660. https://doi.org/10.1093/rfs/hht112
Chan, K., & Chan, Y. C. (2014). Price informativeness and stock return synchronicity: Evidence from the pricing of seasoned equity offerings. Journal of Financial Economics, 114(1), 36–53.
Chan, K., Menkveld, A. J., & Yang, Z. (2021). Information asymmetry and liquidity synchronicity. Journal of Financial Markets, 54, 100600. https://doi.org/10.1016/j.finmar.2020.100600
Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter? Journal of Financial Economics, 86(2), 279–305. https://doi.org/10.1016/j.jfineco.2006.09.005
Chordia, T., Roll, R., & Subrahmanyam, A. (2000). Commonality in liquidity. Journal of Financial Economics, 56(1), 3–28. https://doi.org/10.1016/S0304-405X(99)00055-5
Chordia, T., Sarkar, A., & Subrahmanyam, A. (2005). An empirical analysis of stock and bond market liquidity. Review of Financial Studies, 18(1), 85–129. https://doi.org/10.1093/rfs/hhh007
Christensen, J. H., & Gillan, J. M. (2018). Does quantitative easing affect market liquidity? Federal Reserve Bank of San Francisco Working Paper Series. https://doi.org/10.24148/wp2018-21
Clancy, D., Dunne, P. G., & Filiani, P. (2019). Liquidity and tail-risk interdependencies in the euro area sovereign bond market. European Stability Mechanism Working Paper. https://doi.org/10.2139/ssrn.3474826
Dang, T. L., Moshirian, F., Wee, C. K. G., & Zhang, B. (2015). Cross-listings and liquidity commonality around the world. Journal of Financial Markets, 22, 1–26. https://doi.org/10.1016/j.finmar.2014.11.003
Dang, T. L., Nguyen, T. T., & Phan, D. H. B. (2023). Financial reporting quality and stock liquidity: Evidence from an emerging market. Journal of International Accounting, Auditing and Taxation, 50, 100523. https://doi.org/10.1016/j.intaccaudtax.2023.100523
Daske, H., Hail, L., Leuz, C., & Verdi, R. (2008). Adopting labels: Heterogeneity in the economic consequences around IAS/IFRS adoptions. Accounting and Business Research, 38(3), 173–199.
Domowitz, I., Hansch, O., & Wang, X. (2005). Liquidity commonality and return co-movement. Journal of Financial Markets, 8(4), 351–376. https://doi.org/10.1016/j.finmar.2005.06.001
Edmans, A., & Manso, G. (2011). Governance through trading and intervention: A theory of multiple blockholders. Review of Financial Studies, 24(7), 2395–2428. https://doi.org/10.1093/rfs/hhy108
Fama, E., & French, K. (2007). Disagreement, tastes, and asset prices. Journal of Financial Economics, 83(3), 667–689. https://doi.org/10.1016/j.jfineco.2006.01.003
Favero, C., Pagano, M., & Von Thadden, E.-L. (2010). How does liquidity affect government bond yields? Journal of Financial and Quantitative Analysis, 45(1), 107–134. https://doi.org/10.1017/S0022109009990494
Florou, A., & Kosi, U. (2008). IFRS adoption and market liquidity. European Accounting Review, 17(4), 625–651.
Gagnon, L., & Karolyi, G. A. (2009). Information, trading volume, and international stock return comovements: Evidence from cross-listed stocks. Journal of Financial and Quantitative Analysis, 44(4), 953–986. https://doi.org/10.1093/rapstu/raac007
Gill, N., Biger, N., & Mathur, N. (2010). The relationship between working capital management and profitability: Evidence from the United States. Business and Economics Journal, 2010(7), 329–340. https://doi.org/10.13106/jafeb.2020.vol7.no9.329
Habib, A., Hasan, M. M., & Al-Hadi, A. (2022). Financial reporting quality, liquidity risk, and market efficiency. Accounting & Finance, 62(1), 1021–1052. https://doi.org/10.1111/acfi.12848
Hussain, W., Khan, M. A., Gemici, E., & Olah, J. (2021). Governance, firm internationalization, and stock liquidity among selected emerging economies from Asia. The Journal of Asian Finance, Economics, and Business, 8(9), 287–300.
Jiang, X., Lin, G. H., Huang, J. C., Hu, I. H., & Chiu, Y. C. (2021). Performance of sustainable development and technological innovation based on green manufacturing technology of artificial intelligence and blockchain. Mathematical Problems in Engineering, 2021, 1–11. https://doi.org/10.1155/2021/5527489
Kamara, A., Lou, X., & Sadka, R. (2008). The divergence of liquidity commonality in the cross-section of stocks. Journal of Financial Economics, 89(3), 444–466. https://doi.org/10.1016/j.jfineco.2007.11.008
Karnaukh, N., Ranaldo, A., & Söderlind, P. (2015). Understanding FX liquidity. Review of Financial Studies, 28(11), 3073–3108. https://doi.org/10.1093/rfs/hhv038
Karolyi, G. A., Lee, K. H., & Van Dijk, M. A. (2012). Understanding commonality in liquidity around the world. Journal of Financial Economics, 105(1), 82–112. https://doi.org/10.1016/j.jfineco.2012.01.003
Kheifets, I. L., & Phillips, P. C. (2023). Fully modified least squares cointegrating parameter estimation in multicointegrated systems. Journal of Econometrics, 232(2), 300-319. https://doi.org/10.1016/j.jeconom.2021.07.002
Koch, A., Ruenzi, S., & Starks, L. (2016). Commonality in liquidity: A demand-side explanation. Review of Financial Studies, 29(8), 1943–1974. https://doi.org/10.1093/rfs/hhw026
Lee, B. S., & Rui, O. M. (2021). Liquidity commonality and emerging stock markets. Emerging Markets Review, 47, 100782. https://doi.org/10.1016/j.ememar.2021.100782
Lee, K. H. (2011). The world price of liquidity risk. Journal of Financial Economics, 99(1), 136–161. https://doi.org/10.1016/j.jfineco.2010.08.003
Leuz, C., & Verrecchia, R. E. (2000). The economic consequences of increased disclosure. Journal of Accounting Research, 38(Supplement), 91–124. https://doi.org/10.2307/2672910
Li, J., & Zhou, X. (2024). Bank liquidity support and market synchronicity: Evidence from U.S. funding programs. Journal of Financial Stability, 70, 101122. https://doi.org/10.1016/j.jfs.2024.101122
Li, W., Krause, R., Qin, X., Zhang, J., Zhu, H., Lin, S., & Xu, Y. (2018). Under the microscope: An experimental look at board transparency and director monitoring behavior. Strategic Management Journal, 39(4), 1216–1236. https://doi.org/10.1002/smj.2756
Liang, H., Zhang, Y., & Wong, M. C. S. (2024). Liquidity synchronization and macroeconomic volatility: Evidence from emerging Asian economies. Emerging Markets Review, 50, 100875. https://doi.org/10.1016/j.ememar.2024.100875
Madhavan, A. (2000). Market microstructure: A survey. Journal of Financial Markets, 3(3), 205–258. https://doi.org/10.1016/S1386-4181(00)00007-0
Martínez, M. A., Nieto, B., Rubio, G., & Tapia, M. (2005). Asset pricing and systematic liquidity risk: An empirical investigation of the Spanish stock market. International Review of Economics and Finance, 14(1), 81–103. https://doi.org/10.1016/j.iref.2003.12.001
Meng, F., & Zhao, Y. (2022). How does digital economy affect green total factor productivity at the industry level in China: From a perspective of global value chain. Environmental Science and Pollution Research, 29(52), 79497–79515. https://doi.org/10.1007/s11356-022-21434-0
Miah, M. D., & Banik, S. L. (2013). Measuring weak form market efficiency: The case of Dhaka Stock Exchange (variance ratio test application). https://doi.org/10.1504/IJFSM.2013.058069
Patel, S., & Sharma, M. (2017). Impact of regulatory reforms on market liquidity in India. Journal of Financial Regulation and Compliance, 25(2), 159–176. https://doi.org/10.1108/JFRC-07-2016-0063
Phillips, P. (1995). Nonstationary time series and cointegration. Journal of Applied Econometrics, 10(1). https://doi.org/10.1002/jae.3950100109
Reis, R. (2013). The Portuguese slump and crash and the euro crisis. Brookings Papers on Economic Activity, 44(1), 143–210. https://doi.org/10.1353/eca.2013.0005
Ryu, D., Webb, R. I., & Yu, J. (2024). Liquidity and synchronicity: New evidence from emerging equity markets. Journal of International Financial Markets, Institutions and Money, 89, 102798. https://doi.org/10.1016/j.intfin.2024.102798
Switzer, L. N., & Picard, A. (2016). Stock market liquidity and economic cycles: A non-linear approach. Economic Modelling, 57, 106–119. https://doi.org/10.1016/j.econmod.2016.04.006
Tran, N. H., Pham, H. T., & Vu, T. T. (2024). Liquidity synchronization and market-wide information shocks in emerging markets. International Review of Financial Analysis, 92, 103042. https://doi.org/10.1016/j.irfa.2024.103042
United Nations Development Programme (UNDP). (2023). Human Development Report 2023/2024: Breaking the gridlock. New York: UNDP. https://hdr.undp.org
Vo, T. T. A., Dang, T. L., Dang, M., & Hoang, V. A. (2021). Institutional ownership and commonality in liquidity. Research in International Business and Finance, 57, 101422. https://doi.org/10.1016/j.ribaf.2021.101422
Wang, J. (2013). Liquidity commonality among Asian equity markets. Pacific-Basin Finance Journal, 21(1), 1209–1231. https://doi.org/10.1016/j.pacfin.2012.06.003
Zhang, J., Liu, Y., & Chen, L. (2024). Mandatory CSR disclosure and stock price synchronicity: Evidence from China. Journal of Business Ethics, 189(3), 765–790. https://doi.org/10.1007/s10551-023-05329-7
Additional Files
Published
Issue
Section
License
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
