ProductMarket Power and Stock Market Liquidity

According topredictionsin the literature, sock price offirms with greater product market power is less sensitive to order flows which results in greater stock liquidity. This prediction was examined in a sample of 75 listed companies in Tehran Stock Exchange during 1388 to 1391 using three illiquidity measures (Amihud Ratio, Quoted Spread, Effective Spread) and two proxies for market power. The results of panel regressions showed that stock liquidity increases with market share (the first proxy of market power). Findings also showed the relationship between operational income ratio (second proxy of market power) and stock liquidity is not meaningful and consistent with theory. It seems that the reputation of firms in product market (respect to market share) results in higher stock market liquidity than their profitability. Other results confirmed that advertising in product market doesn’t influence stock market liquidity, directly.