Does Liquidity Mitigate Stock Price Slippage Risk? Empirical Evidence From Vietnam

Abstract

In this research, we evaluate the impact of stock liquidity on the possibility of price slippage in the Vietnamese stock market by using 360 stocks on two exchanges: Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) in the period 2016 - 2022. This topic is especially important for emerging markets because of the Owners' control may limit internal governance monitoring, thereby examining the impact of stock liquidity as a governance mechanism for managers. The method used in the article is the OLS least squares method with year and industry fixed effects and the GMM generalized regression method with lagged variables. To measure the risk of price slippage, we use two indices, NCSKEW and DUVOL, to improve the robustness of the results. These two indices have also been used in many previous research articles (Chang et al., 2017; Chauhan et al., 2017; JS Chen et al., 1999). During the empirical analysis, the team found that stock liquidity plays an important role in minimizing the risk of stock price collapse. We find that as the ratio of non-trading days increases, the risk of stock price decline also increases, and as the stock turnover ratio increases, the risk of stock price decline also increases. In addition, a company's scale of operations, accumulated profits and yield volatility also affect the risk of stock price collapse. Based on these research results, we propose a number of recommendations for policymakers, businesses and investors.