Firm Performance and Stock Market Liquidity

This paper investigates the relation between stock liquidity and firm performance. Many researches have been done over this issue in the countries in which the capital market is a main source of financing for the firms but in spite of fast growing of capital market in Iran, few studies have been done in this regard. The empirical analysis uses a panel data of 154 companies listed in Tehran Stock Exchange from 2001 to 2009. For the first time in Iran, we compared the relation between two criteria of performance (ROA and Tobin’s Q) and liquidity from the Agency and Feedback Theory point of view with the use of multivariate regressions. We found a significant relationship between liquidity and firm performance. After making a comparison between ROA and Tobin’s Q ratios, the study shows that, because of the use of the market values in measuring of performance, Tobin’s Q ratio is a better criterion.