Liquidity, performance and return relationship in terms of institutional investors: An example of Borsa İstanbul

The aim of this dissertation is to present the effect of stock liquidity on stock return and financial performance and casuality between stock liquidity and financial performance. The stock liquidity proxies are Amihud illiquidity ratio and turnover ratio; financial performance proxies are Tobin Q, Market Value/Book Value(MV/BV), return on assets(ROA) and performance index that is obtained from these performance proxies using principle component analysis. In addition to these basic variables, leverage ratio, beta, interest rate and exchange rate which are control variables are included in the analysis in stages with the thought that these variables will affect the firm performance, stock market and investment decisions. Institutional investors are selected as a group of investors. Institutional investors tradings are taken into account in the calculation of the stock liquidity. In this study, panel data analysis and Dumitrescu-Hurlin casuality test are used. According to the findings: i) When the stock liquidity measured by turnover, there is a positive and significant effect on Tobin Q, MV/BV and performance index; there is a negative and significant effect on ROA. ii) When the stock liquidity measured by Amihud illiquidity ratio, there is a negative and significant effect on Tobin Q; the relationship between the liquidity and MV/BV, ROA and performance index is insignificant. iii) The effect of the stock liquidity on stock return is positive and significant. iv) Finally, it can be concluded that there is twoway casuality between the stock liquidity and financial performance. In the light of these findings, the empirical results show that the stock liquidity affects financial performance and it is a decision criteria in the stock investment.