The effect of stock market liquidity on the market power of banks

Banks and capital markets play important roles in the global economy, especially through financing. Recent innovations and increased liberalization in the financial system have led to less disparity of banks and capital markets. Theoretically, these financial institutions are allowed to work together to support companies rather than compete for business. Analyzing the relationship between these financial institutions in a global and dynamic environment is important because the stability of the financial system depends on the ability of these institutions to perform better. Stock market investors convert their assets into stocks and, therefore, need to consider many factors when investing. On the other hand, in developing countries such as Iran, the stock market is less extensive and efficient than in developed countries, and the stock market price is often not close to the real and intrinsic value of those bonds. Considering that the stock exchange and securities organization operate to equip resources and direct them towards useful and productive investments, studying this issue is very important. The liquidity of the financial markets, especially the stock market, affects economic issues, and the shares of companies with higher liquidity are usually less risky for investment. Therefore, examining the factors affecting the liquidity of the stock market as well as the effect of this liquidity on the market power of banks is an important issue. Considering this importance and the studies that have been conducted in this field, the present research seeks to examine the liquidity of the stock market, the market power of banks, and the effect of the liquidity of the stock market on the market power of banks.

In this study, the dynamic panel approach has been used to examine the dynamics of changes, remove the bias of cross-sectional regressions, and make estimations with higher efficiency. The financial data of 20 banks admitted to Tehran Stock Exchange have been used in the period from 2010 to 2020. The banks examined in this research include Hekmat Iranian, Di, Saman, Sarmayeh, Ansar, Ayandeh, Saderat, Mellat, Parsian, Pasargad, Postbank Iran, Tejarat, Middle East, Iran Zamin, Sina, Karafarin, Gardeshgari, Etebari Melal, Eghtesad Novin and Mehr Eghtesad. The research is conducted based on the econometric approach. In order to solve or minimize the problem of endogeneity and correlation among the independent variables, the dynamic panel data estimation approach or the generalized method of moments (GMM) approach is used.

Based on the results obtained from GMM, the effects of amihud illiquidity variables have been estimated with a negative and significant coefficient of -0.0004. Also, the effect of the market power index with an interval (t-1) and a coefficient of 0.341, the effect of bank size with a coefficient of 0.004, the effect of capital adequacy with a coefficient of 0.027 and the effect of profitability with a coefficient of 0.128 on the market power of banks are found positive and significant. Finally, the effect of the financial leverage index has emerged with an insignificant coefficient of - 0.0022.

Despite the significant developments in various scientific fields, human societies are faced with various limitations. Among them, one can mention the collection of various deposits and their appropriate allocation to meet the financial needs of various economic activities. Meanwhile, one of the most important activities in the capital market is banking operations. Banks contribute a major part of funds in circulation in the society; from this point of view, they play a very important role in economic systems. They also have an undeniable role in regulating economic relationships in the society. In this context, the liquidity of stocks is one of the most important criteria for investors. Due to the increasing importance of liquidity, researchers have widely paid attention to the effective factors involved. Therefore, based on the existing theories and literature, this study seeks to answer the questions ‘Does the liquidity of the country's banking sector shares have an effect on its market power?’ and ‘What are the direction and extent of this effect?’. Therefore, we investigate the effect of illiquidity variables, bank size, financial leverage, capital adequacy and profitability on the market power of banks. In this regard, GMM has been used to estimate the research model. Based on the results, the effect of Amihud illiquidity variables is negative and significant. Also, the effect of bank size, capital adequacy and profitability indicators on banks' market power is positive and significant, and the leverage index has no significant effect.