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July 06, ; Accepted Date: July 22, ; Published Date: Int J Econ Manag Sci 5: This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. Very few studies examined the antecedents of illiquidity in the finance literatures.
This research investigates factors contributing to the problem of illiquidity, a common feature of frontier markets, on the Ghana Stock Exchange GSE. The general objective of the research was to analyze the illiquidity phenomena- its origins, impacts, and potential remedies.
More specifically, the research focused on the effect of illiquidity on stakeholders and identified measures in place to improve the condition. The research adopted a qualitative methodology research with unstructured phenomenological interviews, which enabled participants to share experiences, opinions and perspectives on the problem.
Twenty-two participants representing the major stakeholders on the market were selected for the study, including: The results indicated that there is lack of equity culture in Ghana, with bank loans and personal savings being primary sources of business funding.
Macro-economic instability also affects businesses and investors. Government borrowing at high treasuries interest rates makes stock market less attractive. The study also revealed that market inefficiencies, lack of clear government policy direction and effective regulation also contribute to illiquidity. Based on the findings, it is recommended that the government tackles anti-equity culture through financial literacy programs or education, and establish financial incentives for listed companies.
Government must control borrowing through prudent fiscal policies, maintain macro-economic stability, and implement effective policies and regulations that promote listing of State Owned Enterprises SOEs , local private companies and foreign businesses on the GSE.
A major challenge facing frontier and emerging stock markets is the problem of illiquidity. Stock market illiquidity has been shown to have significant impact on current and future rate of economic growth, capital accumulation, and productivity growth [ 1 , 2 ].
On the GSE, the problem of illiquidity can be described as chronic. Although there are thousands of limited companies in the country, the size of listed companies has remained between 30 and 35 for over two decades.
Since the market is not well researched [ 3 ], information on factors contributing to market illiquidity on GSE, and frontier markets in generally, is also limited in supply.
This research highlights the challenges and risks faced by stakeholders investors, traders, issuers, intermediaries and regulators , how market participants meet and adapt to the challenges and risks involved in trading in illiquid markets, and stakeholder perspectives on what factors of illiquidity need to be tackled to improve the performance of the GSE.
The purpose of the research study is to find out and understand better origins of illiquidity, its impact as well as measures hitherto taken and those that need to be taken in order to tackle the problem of illiquidity on the Ghana Stock Exchange.
Frontier markets including Ghana have been described as attractive investment destination for investors. According to Stevenson frontier markets are similar to emerging markets but are less liquid and not well researched. In terms of economic development, Constable noted these markets are the least developed and are generally poor countries with growth potential to becoming emerging e. With the exception of South Africa, sub- Saharan African SSA economies are considered frontier markets, less attractive for investments compared to Asian countries like China and India.
The SSA region, previously identified with wars, poverty and without hope, is now attracting the investment community for all the good reasons. The region is expected to be the most populated, youngest and fast developing urban market in the world. At current growth rates, the population of SSA is expected to hit 2 billion by the year , overtaking China and India projected at 1. Frontier markets are now noted to be less volatile than emerging and developed markets and demonstrate faster economic growth, have young growing population profile, strong macroeconomics, and improved market fundamentals compared with emerging markets; some characteristics that made investing in emerging markets appealing in the s.
Market commentators and investors often complain about inability to unwind positions in frontier markets quickly enough which could be costly. To compete effectively for investor funds as a preferred destination Ghana must quickly address the liquidity concerns of investors.
This research will help to identify the basic problems affecting the market as a step to finding long-term workable solutions to this huge challenge facing the GSE. If it is too risky or costly to trade on the GSE, then trading activity will be low as investors look for alternative investment destinations. Below are some important potential benefits of the research:.
Chiarella, Flaschel, and Semmler argued that illiquidity can cause significant disruption to economic activity and possible bankruptcy for agents undertaking economic activities. Improving liquidity within the GSE will boost economic activity by providing long-term capital opportunities to listed companies in the form of equity to undertake profitable investments. Generally, equity investors look for high investment returns but are particularly attracted to markets where assets can be sold immediately when required [4].
Improving the liquidity of the GSE will make easy entry and exit for investors and reduce liquidity risks. Following recommendations from this research, changes are expected to be introduced on the GSE that will increase the size from the current 35 to over 50 in the next 5 years.
Research conducted on liquidity of frontier markets is generally rather scarce and this is particularly true for the markets in Africa. Given the differences in market microstructure and macroeconomic conditions, there are likely to be unique factors within the business environment of each country that affect the liquidity of the local market differently. Thus, there is the need to provide scientific basis for developing specific solutions in dealing with unique problems at different markets.
The theoretical foundation for market illiquidity has been linked to market imperfections. Market illiquidity is generally explained as evidence of market inefficiency. When prices are determined in a way that equates the marginal rates of return adjusted for risk for all producers and savers the market is said to be efficient in terms of resource allocation.
The market that ensures reasonable cost for transferring funds is said to be operationally efficient. Moreover, a market in which prices fully reflect all available information is said to be efficient in terms of information distribution or availability. According to Butler operational and informational efficiency result in efficiency in capital or resource allocation which is more likely to occur in liquid markets with high volume of transactions.
Stock markets exhibit inefficiencies in many different ways. Market is inefficient where there is limited competition or participation, because unrestricted participation makes the incorporation of relevant information in asset price possible. Thus, absence of willing buyers and sellers due to prohibitive entry costs is a sign of inefficiency.
Another sign of market inefficiency is high transaction costs e. Market inefficiencies are also evidenced in the form of information asymmetry or the condition that information availability to market agents varies depending on source or capacity to process such information. Investors trading on privately available information increase illiquidity costs for other investors that are not privileged to such information.
For example, Jiang argued that inefficiency or illiquidity of the Chinese market provides arbitrage profit opportunities to sophisticated market agents. This suggests that differences in agents either based on size or information processing advantage creates imperfect market condition. Moreover, where market frictions impose funding constraints, agents are likely to have limited access to funding and therefore ability to participate in trading. Thus, there are many factors that contribute to the condition of illiquidity and therefore require collaborative effort of all market participants.
Liquidity is a broad term with different meanings. Generally, liquidity represents the number of bids and offers a market receives. More bids and offers is a sign of healthy market competition, which reduces the bid-ask spread and creates a more efficient market. Traders tend to refer to liquidity in the broader sense to include credit availability, funds flow, asset prices and leverage. Finance and economics literature also differentiates between asset, institutional and national liquidity.
The liquidity of an asset is often described as the ability to trade that asset without affecting price significantly. Institutional or corporate liquidity refers to the ease with which organizations meet financial obligations when due. Thus, whereas market liquidity refers to ease of selling an asset, funding liquidity describes the ease of raising funds or the availability of credit. The availability of funding or credit is important factor for asset liquidity. Liquidity of secondary stock markets can significantly influence the success of initial public offerings as well as determine the cost and risk to underwriters and all other market makers.
Generally, liquid stock markets are less volatile and require relatively lower transaction cost to trade in compared with illiquid markets. To achieve capital allocation efficiency and to reduce cost of capital markets are required to be liquid to attract more investors.
Within the bond and equity market literature, five particular aspects of liquidity are applied in characterizing markets, including: Tightness dimension of market liquidity measures the cost of switching positions. For example, the cost involved in quickly disinvesting a portfolio of stocks. This is captured by the bid-ask spread, with liquid markets showing narrow spreads to discourage significant price changes whilst illiquid markets have wide spreads.
Depth on the other hand refers to the effect of large trade volumes on price. Highly liquid markets have the capacity to incorporate large transactions immediately without significant changes in stock price, but investors in illiquid markets are likely to suffer loss from the same event.
Selcuk and Yilmaz, explained resiliency as the duration involved in restoring market price to equilibrium after significant price movements, due to release of new information to the market or trades involving large volumes of stocks. Robust or resilient markets exhibit short durations but inefficient markets tend to be slow in returning to equilibrium price. Immediacy is a measure of the speed with which transactions are concluded, an indication of the effectiveness of trading, clearing and settlement processes and the trading system in general.
Breadth suggests the existence of large orders of high volume transactions with no material impact on prices. Thus market liquidity cannot be improved by focusing on a single dimension but rather dealing with all the inter-related dimensions con-currently. Sources of market liquidity are generally classified into two main groups, namely: But one significant development in financial markets that led to improved market liquidity is the introduction of innovative financial products although VonHagen and Fender, argued these instruments diminish the effectiveness of monetary policy.
The usefulness of financial products stems from greater improvements in techniques for managing risk. However, integrity and strength of innovative products, structures, markets and laws are all important characteristics that are needed to increase investor confidence.
The availability of these financial products increases competition among credit intermediaries e. Some derivative products are purposely designed to diversify both credit risk exposure and interest rate risks, providing the opportunity for investors to hedge risk or unwind positions on cashless basis.
Furthermore, distribution of risk is achieved through syndication and securitization, enabling high numbers of market participants, both banks and non-bank lenders to provide credit as a syndicate.
Clearly, innovative financial products in advanced economies have contributed immensely to market liquidity but these products are almost non-existent in frontier markets. The questions focused on identifying how market structures and the design of financial system impact liquidity. The following are the four 4 main research questions: The research is qualitative in nature, which is appropriate for developing the understanding of meanings, experiences, behaviors, interactions and social contexts [ 5 - 7 ].
The direction of interviews depended on answers provided by participants on earlier questions. According to Hycner, imposing any form of method on a phenomenon compromises the integrity of a phenomenological study. Thus, data collection and research questions were adjusted according to responses obtained.
Although questions were based on twenty-four variables identified in the literature to affect market liquidity [ 9 , 10 ], the wording and order of the questions differed from one respondent to another. The population for the study covered all listed companies on the GSE, unlisted companies with potential for listing mostly banks and state owned institutions registered brokers, Government Departments, and private individuals.