The Illiquidity-Return Relationship in The Saudi Parallel Market (Nomu) The Case of The Companies Transferred From Nomu To Tadawul

Abstract

The research aim is to investigate the relationship between liquidity and return in seven companies that were listed on Nomu and transferred to Tadawul. First, by comparing the liquidity level of the two markets, the relative bid-ask spread and the volume are used. It can be said that Tadawul is relatively more liquid than Nomu. Second, using accounting ratios, OLS regressions are performed to investigate this relationship, the results support the positive correlation between profitability ratios namely, net profit margin, operational profit, return on assets and return on equity, and the liquidity ratios namely, asset turnover and inventory turnover in five companies, while in two companies liquidity has a negative correlation with the profit. Thirdly, by employing the stocks prices and volume to calculate return and Amihud (2002)’s illiquidity measure, regressions performed to capture illiquidity-return relationship from 2018 to the end of 2020, by covering the time these companies were listed on Nomu and transferred to the main market. Although the adjusted R-squared values in these regressions are low, results are all statistically significant, it supports the positive relationship between illiquidity and return, and also shows than Nomu is relatively more illiquid than Tadawul.