Khóa luận tốt nghiệp Tài chính ngân hàng: The impacts of stock liquidity on stock price crash risk: Case of Real Estate Stocks in Vietnam

CHAPTER 4: THE IMPACTS OF STOCK LIQUIDITY ON STOCK PRICE CRASH RISK INTHE REAL ESTATE INDUSTÌRY...----5 5c 254.1.. This study examines the impact of stock market liquidity on the risk of

VIETNAM NATIONAL UNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

KK

c1 GRADUATION THESIS

LECTURER : PH.D NGUYEN THI NHUNGSTUDENT : LE PHUONG LINH

CLASS : QH 2019 E TCNH CLC 2

DEPARTMENT : FINANCE AND BANKING

Ha Noi, 2023

The completion of a thesis is a significant milestone that signifies the growth andmaturity of a student after four years of studying and honing skills at the university Ihighly appreciate this and I have endeavored to complete my research with the supportand encouragement from my teachers

I would like to express my gratitude to the Board of Directors of the University of

Economics and Business - Vietnam National University, Hanoi, who represent thecollective efforts of all teachers in the school Their dedication in creating a serious yetpractical learning environment and providing us with opportunities to research andexplore economic issues globally is truly appreciated

In particular, I would like to extend my sincere appreciation to Dr Nguyen ThiNhung, the lecturer of the Faculty of Finance and Banking, who personally guided methroughout the research process Despite being under tremendous pressure from workand family, she still found time to provide us with guidance, care, and close supervision.Her detailed and heartfelt comments have greatly enriched and improved my work, and I

am truly grateful for her time and effort

However, due to my limited knowledge and time, some mistakes may have beenmade in my research paper I welcome any feedback and recommendations from all myteachers, so I can further improve my work

I sincerely wish good health, wisdom, peace, and happiness to all my teachers andtheir families

Thank you sincerely!

Ha Noi, April 15, 2023

Author

Le Phuong Linh

I hereby declare that this thesis is the result of my own research and has not beenpublished in any other research work The use of results, quoting other people'sdocuments ensures compliance with regulations The contents of citations and references

to documents, books, and information are published in works, journals and websites according to the list of references of the thesis.

Table of Contents

LIST OF ABBREVTA TÌĨ(ÌNS «-e«cseeseskeeskerskErsrsrikrkeriirHkrrsirirrsrrrsrsrsrsr 6LIST OF TABLES 1n 7CHAPTER 1: INTRODUCTÏON «5< <*EsxskEsEkEskEEskEEskEEkkikikrrrrersrssre 9

1.1 The necessity of the topic - (5 ST TH TT ng 9 1.2 Research objectives and faSÌKS <5 < Họ HT HH TH ng ngư 10

1.2.1 Research Obj©CfÏV€S ¿6-5 22t 2 2222 121112111111211111.2112111211111111.11111.211111.11.11.11011 1e 10

1.3 Research Qu©StÏOIIS << <9 TT TT TH TH TH nợ 11

1.4 Subjects and scope Of the SEUỈV - 5 5 << HT HH gu Hư 11L.A.L Study SUDjECES 7 '^'."-.'"^-"-.-.-.- ÔỎ 111.4.2 Scope of the Study eccscsssscsseecsssescsssecsnessssscssnecsnneessueessuseessesessuseesansessuteesaeessneessneesanseesnneesey 111.5 The S{TUCẨUF€ - G- GỌI THỌ TH TH TH TH HT TH 11

CHAPTER 2: LITERATURE REVIEW AND THEORICAL FRAMWORK ABOUT THE IMPACTS

OF STOCK LIQUIDITY ON STOCK PRICE CRASH RISK -«c-<-«e<<seeeexeseseesxe 12

2.1 Literature review about stock liquidity, stock price crash risk, and relationshipbetween stock liquidity and stock price crash risk -< «<< ssseseeseesseee 122.1.1 Studies about Stock Liquidity 0 cccseessesssessesssessseeseesnecsecsnecscenecsuscsecsuecsecenecseesnecseesneeseenneesees 122.1.2 Studies about stock price crash risk eecccseesssssessssseeseesseesnesseecnecsesenecsuceseesnecseesneeseesneeseeneesees 132.1.3 Studies about the relationship between tock liquidity and stock price crash risk 152.1.4 Research Bap o eeeseesseecssesssessnessssessssssnscsnscesnecsnscensessseesnsesuscsssecsnsesnsessneesneesusecseessnsesueecaeesneesneesaneeaeeseess 172.2 Theorical framework about stock liquidity, stock price crash risk, andrelationship between stock liquidity and stock price crash risk

2.2.1 Overview about stock lÏqu]dÏt chư

2.2.2 Overview about stock price crash riSkK -c:+ccc+cxttrrrrrrrrrrirrrrrrrrrrrrirrrrrrrrie 192.2.3 Impacts of stock liquidity on stock price crash risk -. cccccccxcsrresrrrrrrrrrree 21

CHAPTER 3: METHODOLOGY «-e-csccseeseeseeerskksErsirsrtrrtrrstrsirsisirsrrirrsirsirsisrssrsre 22

3.1 Measuring variables «0.0.0.0 ccccssssssscssessessscssccescesscesscessesscesseesseseeessessceseeeseeseeseneees 223.1.1 Dependent variables: DUVOL s:ssssssssssssssssessseessesssesseesseeesseesneesneesseeeseesatessueesanenneeeaneesaees 223.1.2 Independent variables: TURN ecccssssesssssssesssneeseeesseesneesnsesseeesneesnseenseesueesueeeneeenneesetecsesenneeneess 223.1.3 Control] variables 0 cecsecssseecsseessseesssseessuessseecssuecsusecsueeessuesssseessuessseesssueessusecssueessuessnneessies 223.2 Data COlÏ€CẨÏOIN 5-5 <1 TH TH TH HH TH TH HH ng ng ngờ 233.3 Data amallySis - TH TH TH TH HH HT TT II 23

CHAPTER 4: THE IMPACTS OF STOCK LIQUIDITY ON STOCK PRICE CRASH RISK IN

THE REAL ESTATE INDUSTÌRY 5 5c 254.1 Overview of real estate stocks in Vietnnam - - «5< ngàng re nưen 254.1.1 Real estate market in 2019-2022 oo ecceecsssesseessesesnessseeesneecneessecesneeseecsecesnsesatecneeesneesneeeneeesneees 254.1.2 Overview of real estate DUSINESSES eeeceeeseeessesesneesseessneeseeesseesneesueessecesneesetecneessneesnteeneeeneeeed 264.2 RES€ Arch PeSult << 5 HH HH TH TH HH ii ng 274.2.1 Data descriptive sStatÏSfÏCS che 274.2.2 Matrix of COrrelations 77676 294.2.3 Multivariate regression MOE] cessesssesecssesteessesseessesseessecseessecseesseessecsesseesessseeseesseeateeneeneete 30

CHAPTER 5: DISCUSSIONS AND RECOMMENDATTIONS e.eseseseeerieeiee 355.1 DÏSCUSSÏOINS - G- GHI HH HH TH TH TH HH tt 35

5.2 RECOMMENAATIONS <5 <5 < 1 Họ Họ in 37REEERENCES - «SH HHHHHHHHHHHTHHHHEEEEEEEEEEESEEEEETSi 39

LIST OF ABBREVIATIONS

TT Acronyms English meaning Vietnamese meaning

1 | 2SLS Two-stage least square Binh phương nhỏ nhất hai giai

đoạn

2 | BIST Borsa Istanbul emerging Thi trường chứng khoán mới nổi

equity market Borsa Istanbul

3 | CSR Corporate social Trách nhiệm xã hội của doanh

responsibility nghiệp

4 | DiD Difference in difference Su khac biét-trong-khac biét: cach

approach để ước tinh tác động của các chính

sách mới

5 |US United states Hoa Kỳ

6 |USD United States dollar Đồng đô la Mỹ

7 | HOSE Hồ Chí Hose hồ chí minh stock HOSE Hồ Chí Minh Stock

Minh Stock

8 |VN-Index Viet nam security market Chỉ số thị trường chứng khoán

inde Việt Nam

9 |GDP Gross domestic product Tổng sản phẩm quốc nội

10 | FDI Foreign direct investment Đầu tư trực tiếp nước ngoài

11 | VNREAL Vnallshare Real Estate Chỉ số đại điện cho nhóm bất động

sản trên sàn HoSE

12 |VND Viet nam dong Việt Nam Đồng

13 |NPV Net present value Giá trị hiện tại ròng

LIST OF TABLES

Tables PagesFigure 4.1 The most profitable real estate corporates in 2022 27Table 3.1 Definition of variables 23

Table 4.1: Descriptive Statistics 28Table 4.3: Matrix of correlations 29

Table 4.4 Model Summaryb 31

Table 4.5 ANOVA2 31

Table 4.6 Coefficients? 31

This study examines the impact of stock market liquidity on the risk of stock pricecollapse in Vietnam's real estate industry The real estate industry in Vietnam is one of theleading economic sectors in the country, dominating the economy and stock market.Recently, the industry has attracted a lot of attention from experts and investors due toits continuous fluctuations, and thus real estate stocks are also of special interest This

study draws data from real estate stocks on the HoSe exchange, which belongs to the

VN-Index, during the period 2019-2022 Based on the empirical data and research process,The research findings indicate that there is no significant impact of stock liquidity on therisk of stock price crash in the Vietnamese real estate industry during the period of 2019-

2022 However, the study emphasizes the importance of continued observation andanalysis of this topic in both the present and future The article hopes to contribute boththeoretical and practical significance to help readers manage the risk of stock pricecrashes through stock market liquidity

Keywords: Stock liquidity, crash risk, stock market, real estate stocks, Vietnam

CHAPTER 1: INTRODUCTION

1.1 The necessity of the topic

The stock market is a key component of nation’s economic activities, serving as animportant tool for capital mobilization for business, providing transactions, pricing andtransferring financial assets It’s also a vital market for domestic and foreign investors toinvest and generate profit, impact greatly on financial and investment activities of

individual and organization Liquidity in this market, particularly stock liquidity, has considerable influence on the stability and development of the economy.

Stock liquidity is determined by the ability to trade with stable price of stockcompany in the short term (Chang et al.,2017) It plays an important role in creating abalanced and stable market, limiting the risks for investors When the stock liquidity ishigh, investors can sell quickly and easily, helping to balance supply and demand in themarket and minimize risk in difficult market conditions or sudden drops in stock prices.Conversely, if stocks have low liquidity, buying and selling on the market may becomeimbalanced, leading to price crashes and negative impact on investors Therefore, wheninvestors choose stocks, they often consider various factor such as company information,

stock liquidity or stock price crash risk There have been several instances in the history

of Viet Nam’s stock market witnessed stock price crash risk due to market liquidity Largesell-off pressures from major shareholders can amplify the market’s reaction to thenegative information about companies and cause stock prices to plummet (Xinchang et

al.,2017)

In case of Viet Nam’s stock market, particularly the real estate sector, it’s currently

a huge concern for expert and investors Real estate is considered one of the mostimportant economic sectors in the national economy, with direct relationships with otherfinancial markets such as the currency market and labor market Investing and doingbusiness in real estate is one of the leading economic sectors, contributing to increasingbudget revenues and accounting for a significant proportion of a country's GDP In recentyears, the real estate industry has contributed an average of 4.5% to the country's GDP,ranking second in attracting foreign direct investment (FDI), accounting for

approximately 10% of new registered FDI annually According to the VNREAL report, the

total market capitalization value of the real estate sector reached nearly 700 trillion VND,accounting for 17% of the entire HoSE market However, the Vietnamese real estateindustry has faced many difficulties and fluctuations in recent years Firstly, it is

impossible not to mention the impact of Covid-19, which has caused most real estateprojects across the country to halt construction due to many supply chain disruptions,production breaks, and declining market liquidity Secondly, after emerging from theCovid-19 pandemic, the market faced more significant difficulties, notably bond defaultsand business leaders being embroiled in scandals, making investors hesitant Tight creditpolicies have also caused delays in transactions, leading to the suspension of ongoingprojects These evidences have caused a sharp decline in the profitability of the entire real

estate sector, with stocks "bottoming out," significant liquidity risks, and a loss of investor confidence in the real estate market as well as real estate stocks As the recent growth of

real estate industry has raised doubts about whether it’s a revival of the industry after aprolonged period of decline with historically low liquidity While numerous real estatestock price crash risk have been extensively documented in the literature, it’s still unclearthe relation between stock liquidity and stock price crash risk Therefore, conductingresearch how liquidity affects the stock price crash risk of the real estate sector is of greatimportance to economists and regulators with clearer understanding of the marketsituation and trends The author chose the topic "The impacts of stock liquidity onstock price crash risk: Case of Real Estate Stocks in Vietnam" to convey the

importance of the current state of the real estate stock market in Vietnam through two

variables: stock liquidity and crash risk The aim of the research is to shed light on thedirectionality of the impact between real estate stock liquidity and crash risk, while alsoproviding insightful knowledge about a specific industry that plays a crucial role in the

country's economy This, in turn, can lead to more inform and effective investment and

risk management decision

1.2 Research objectives and tasks

1.2.1 Research objectives

Determining the relationship between stock liquidity and stock price crash risk inthe real estate industry and making recommendations for investors and policy makersbased on that

- Provide recommendations and solutions for investors and policy makers.

1.3 Research questions

- Question 1: What is the practical evidence of the relationship between stockliquidity and stock price crash risk in the real estate industry over a period from 2019 to

2022?

- Question 2: What should investors pay attention to when investing on real estate

stock on the Vietnam stock market?

1.4 Subjects and scope of the study

1.4.1 Study subjects

Stock liquidity, stock price crash risk, real estate industry and the relationshipbetween stock liquidity and stock price crash risk in the real estate industry

1.4.2 Scope of the study

- Scope of content: This essay investigates the impact of stock liquidity on stock pricecrash risk in real estate industry This link will be specifically analyzed in the context ofStock Market in Viet Nam

- Space range: The scope of the study is 57 real estate stocks which are listed on HoSE

- Ho Chi Minh Stock Exchange

- Time range: The research period is limited from 2019-2022

CHAPTER 2: LITERATURE REVIEW AND THEORICAL FRAMWORK ABOUT THE

IMPACTS OF STOCK LIQUIDITY ON STOCK PRICE CRASH RISK

2.1 Literature review about stock liquidity, stock price crash risk, and relationshipbetween stock liquidity and stock price crash risk

2.1.1 Studies about stock liquidity

Both academia and the general public have given the subject of liquidity a lot of

attention By influencing investors’ trading decisions due to a decrease in transaction costs involved with changing investors’ portfolios, increased liquidity might result in a

better pooling of financial risks While some empirical research reveals that effects ofliquidity on asset prices are both statistically and economically significant, some theoriespredict that both the degree of liquidity and liquidity risk are priced

According to a study on stock liquidity and corporate cash holding by Hu et al.,(2019), US firms with liquid stocks hold less cash after adjusting for a number of firmcharacteristics, industry, and year fixed effects This finding suggests that stock liquidityhas a detrimental effect on the cash holding of US companies First of all, they emphasizedthat stock liquidity lowers the cost of issuing stocks and debt as well as the cost of asset

liquidity Second, increased stock liquidity makes managers less entrenched by boosting

the risk of leaving and raising shareholder intervention

Another study contends that highly liquid stocks attract higher prices and thusbecome more liquid, while sellers seize the opportunity Conversely, low stock liquidityleads to a tendency for lower prices and price decreases, as observed by Farzaneh et al.,(2012) in their study on the relationship between stock liquidity and stock price changerate According to authors, liquidity is considered an index to attract and trade assets.Using regression analysis, the positive percentage change in liquidity was found to have

an impact on the percentage change in price, although this result is inconsistent with thestudy by Omnri et al., (2010), who concluded a negative relationship between stockliquidity and stock turnover governance by increasing shareholder intervention andamplifying the risk of exit, making managers less entrenched

According to the Amihud., (2002) illiquidity premium theorem, the market'sexpectation of low liquidity has a favorable effect on the historically superior stockreturns, suggesting that the expected superior stock returns partially reflect thecompensation for the lack of liquidity discussed in the study "Illiquidity and stock returns:cross-section and time-series effects." To create a measure of a stock's illiquidity, the

12

study analyzed data on trading volume and daily stock prices Illiquidity has a higherimpact on stocks of smaller companies, the study also revealed.

Tram Anh et al., (2022) study about the impact of market liquidity on stock returns

from Vietnamese stock market demonstrate that market liquidity has a favorable impact

on the excess return on the market According to the author, investors anticipate largegains from equities as a result of the optimistic market attitude, which is indicated by anincrease in stock liquidity Additionally, stock liquidity may rise as a result of market

participants’ irrational behavior.

2.1.2 Studies about stock price crash risk

Theoretical framework that promote the risk of stock price collapse often have threecriteria First, the behavior of concealing information and the characteristics of thecompany; corporate managers often intentionally conceal information reflecting theintrinsic value of the company for an extended period by using vague and ambiguousinformation and items on financial reports Gaps in the cost accounting method make itpossible for companies to conceal limitations, making it difficult for investors todetermine the current value of projects or companies Negative information will continue

to be manipulated, accumulated into a certain volume, causing stock prices to be

overpriced, exceeding their actual value At this point, if the information is made public, it

will change the expectations of many investors, causing immediate pressure to reducestock prices According to Benmelech et al., (2010) managers who are rewarded withstocks tend to participate in projects with negative NPV (net present value) to make thecompany seem to have more opportunities for development even though they are actuallydeclining The second criterion is the disagreement of investors This theory is based onthe fact that the market currently has two different groups of investors: those who areoptimistic about the future of the company and those who are pessimistic Therefore, theywill think and act differently to achieve the highest profit results However, pessimisticinvestors will have difficulty profiting from trading due to the emergence of short sellingrestrictions, making the stock price unable to accurately reflect the amount of informationthey hold When accumulated negative information pushes the stock price far away fromits intrinsic value, if it is disclosed to the public, optimistic investors will immediatelychange their expectations about the future of the stock and decide to exit their positions,leading to panic selling This will result in a sudden decline in the stock's value, causing aphenomenon of stock price collapse The third criterion is the investor's perspective,which also plays a significant role in determining the risk of stock price collapse These

13

investors often prefer projects that can generate high returns in the short term Therefore,they put pressure on managers in the company, forcing them to focus on short-terminvestment activities rather than long-term ones This behavior forces managers to try toimprove profit results by concealing information.

Huang et al., (2020) intended to ascertain how foreign investors affect the likelihood

of stock price crash risk on the Chinese stock market The findings demonstrated that thechance of stock price crashes is greatly increased by foreign investors, especially for

businesses with strong profitability, asymmetric information, or efficient internal control The authors also pointed out that the presence of stock price crash risk does not

guarantee that a crash will take place Companies with a greater crash risk eithercommunicate their genuine worth to the outside world or take proactive steps tostreamline governance structures, allocate resources efficiently, and increase operationaleffectiveness

According to Kim et al., (2014), crash risk is defined as the conditional skewness ofreturn distribution rather than the probability of extreme negative returns distribution,incorporates asymmetry in risk and is crucial for investment decisions and riskmanagement This study investigates whether CSR reduces or increases the probability of

future stock price crashes CSR would be related with lower stock price crash risk if

socially conscious businesses commit to a high standard of financial reportingtransparency and hence display less bad news hoarding behavior On the other hand, CSRmay be linked to a higher crash risk if management use it to hide bad news and distractshareholder attention

Vo (2020) examined the behavior of stock price crash risk in emerging marketsusing data from companies listed on the Hose exchange, employing econometric methods.The study revealed a correlation between foreign ownership and stock price crash risk.Companies with high levels of foreign ownership give market managers in emergingmarkets more incentives to manipulate the flow of information into the market Managersare afraid that foreign investors are sensitive to negative news and tend to withhold suchinformation, increasing the risk of stock price collapse In addition, emerging markets lack

a strong corporate governance system to reduce information asymmetry and excessive

volatility, as well as a strong regulatory framework, leading to higher rates of stock price

crash risk

According to research by Kim et al., (2020), the presence of foreign investors cangreatly reduce the risk of future stock market crises for local businesses By preventing

14

managers from hiding negative news, the study found that foreign investors may be able

to lower crash risk by contributing to enhanced financial reporting quality Foreigninvestors also perform an essential external monitoring role that lessens the tendency tohoard negative information, which reduces the likelihood of repeat crashes for localbusinesses This is especially true when foreign investors are better familiar with theinstitutional landscape of the host nation, have greater incentives to keep an eye on localcompanies, and when local businesses exhibit higher levels of governance effectiveness

2.1.3 Studies about the relationship between tock liquidity and stock price crash risk

Prior research has presented divergent views on the relationship between stock

liquidity and crash risk According to the governance theory, higher stock liquidity couldreduce crash risk by enabling blockholders to better monitor the firm's management, assuggested by Edmans (2009) More effective monitoring by blockholders could decreasethe likelihood of bad news formation, which could result from inefficient investmentdecisions and ultimately lower crash risk Additionally, higher stock liquidity promotesinformed trading and enhances information production, as proposed by Holden et al.,(2014) As a result, stock prices become more informative about the company’s economicfundamentals, making it more difficult for managers to withhold bad news for an

extended period of time, and consequently lowering crash risk.

Two theories have emerged from previous studies regarding the relationshipbetween stock liquidity and crash risk First, the short-termism theory suggests thathigher liquidity could attract more transient institutional investors with a short

investment horizon and excessive focus on the company's short-term performance, as

outlined by Chang et al., (2017), Chauhan et al., (2017), and Fang et al., (2014) To avoidthe downward pressure on stock prices exerted by these investors, managers maywithhold bad news to inflate short-term earnings Such behavior can lead to theaccumulation of bad news over time, which is eventually released, triggering "cutting and

running" selling by transient investors and causing a crash Second, governance theory

also posits that higher stock liquidity can enable blockholders to exit more easily, whichcontributes to better governance mechanisms and creates a limitation on the risk of futureprice decline

Chauhan et al., (2017) used the DiD approach and exploiting the variation in stock

liquidity generated by stock splits, and 2SLS regression to demonstrate that stockliquidity has a negative causal effect on stock price crash-risk The study identified twopracticable liquidity strategies that can lower the likelihood of stock market crashes First

15

of all, the stock's increased liquidity gives owners more power to interfere, which putspressure on managers to not withhold unfavorable news Second, managers areprohibited from manipulating the stock price by holding negative news to increase short-term earnings because the company's liquidity enhances pricing information Therefore,stock liquidity can support internal governance, which can be fostered by altering currentfinancial market regulations to reduce the likelihood of stock price crash risk.

On the other hand, Chang et al., (2017) found that ownership of a company by

non-regular investors and non-blockholders is driving liquidity effects Future negative

earnings reports from liquid firms are more likely to cause speculative investors to sell,rather than large shareholders Short-term investors are overly focused on short-termprofits and ignore the intrinsic value of the company, which motivates managers todeliberately withhold bad news to avoid triggering short-term investors to sell Whenenough terrible news is collected, it will eventually be released all at once, leading to acrisis In case the market reacts strongly to negative news, high liquidity createsconditions for investors to easily withdraw from the market when they realize that short-term expected returns are not met Additionally, high liquidity helps organizations toleave temporarily more easily, which amplifies the stock price reaction after negative

news is announced.

According to Sezgin et al., (2021), there is a larger likelihood of future stockcollapses as market liquidity increases In the study, two explanations for the link arelooked into First, the effect of block holders is considered, and the findings do not indicate

that the favorable impact of stock liquidity on crash risk is more pronounced for

companies with larger block ownership In light of the significant trading volumeconducted by foreign investors, the role of foreign ownership is then studied Becauseinternational investors participate in the stock market, research demonstrates that highstock liquidity considerably increases crash risk because it makes it easier for them to sellstocks in response to bad news This selling behavior amplifies a negative response ofother investors to negative news about the company, causing significant drops in stockprices and ultimately stock price crashes According to the findings, policies that attempt

to lessen market liquidity may help to reduce the probability of stock price crashes

The belief that liquidity reduces the phenomenon of stock price crash is alsosupported by Edmans et al., (2013), who found that increasing liquidity helps strategicinvestors to easily purchase a large amount of shares at a low transaction cost, therebyincreasing their ownership percentage and becoming large shareholders in the company

16

These shareholders, with advantages in information ownership and costs, can establishstrict monitoring mechanisms of the behavior of leaders, forcing them to establishtransparent and clear information policies to limit the incentive to hoard information thatdeceives investors, while simultaneously improving the value of the shares Thus, the risk

of stock price decline will decrease when stock liquidity is higher - emphasizing theimportance of liquidity as a buffer against stock price crash risk

focus on measuring the impact of stock liquidity on stock price crash risk and related

factors This study will also be the first to investigate the impact of stock liquidity on stockprice crash risk in the Vietnamese real estate market during the 2019-2022 period.Additionally, this research will face significant challenges in finding correlation evidencebetween stock liquidity and price crash risk due to the volatile market conditions and thepoorly regulated legal framework in the real estate industry in Vietnam

2.2 Theorical framework about stock liquidity, stock price crash risk, andrelationship between stock liquidity and stock price crash risk

2.2.1 Overview about stock liquidity

2.2.1.1 Definition of stock liquidity

Stock liquidity is considered an important indicator of their popularity andattractiveness in the market Stock liquidity is defined as the ability of a stock to be boughtand sold quickly and easily on the stock market, at a stable price over a short period oftime (Chang et al., 2017) A stock with high liquidity means that it is traded frequently inthe market, helping to balance supply and demand and stabilize the market Conversely,

17

low liquidity leads to an imbalanced market, causing a drop in stock prices and negativeimpacts on the market and investors.

2.2.1.2 Measurement of stock liquidity

Liquidity is a broad definition with many different aspects, and using a singlemeasurement cannot encompass the entirety of it Below, the author presents severalmeasurement methods, including 3 liquidity measures and 1 illiquidity measure These 4measures are commonly used in studies by scholars around the world The measurement

methods for these measures will be presented below.

(i) Illiquidity ratio

The illiquidity (ILLQ) measure developed by Amihud in 2002 is used to assessliquidity This measure shows the daily price changes for a specific trading volume, whichroughly reflects the impact of trade on prices The average ratio of the absolute value ofdaily returns (ret) to the daily volume for firm i on day dina given year is Amihud's (2002)illiquidity measure, which is shown by the equation The trade days in a year areabbreviated as T D

D

ro =< 2 » |RET;a|

dự = Dia £4 VOLia

(ii) Bid-ask spread

Amihud and Mendelson., (1986) cite the bid-ask spread as one of the best and mosttraditional metrics of liquidity We can learn about liquidity by comparing the purchaseand sale prices of various companies The asset is simple to sell and has a high tradingvolume when the spread is tiny, thus individual purchase or sell orders have little effect

on the market price

(iii) Trading volume

The most popular technique for measuring is the use of trading volume ratios, whichare regarded as an indicator of a stock's liquidity in the market, according to Campbell,Grossman, and Wang., (1992) They think the volume of previous trades can providecrucial details about stocks The liquidity of a stock is higher when the trading volumeratio is higher

TradedShares;

HQ, = yj

Traded Shares being the total volume of shares traded in year t, and N being the

number of trading days in that year

(iv) Share turnover

18

The liquidity turnover, which is calculated as the number of shares exchanged to thenumber of outstanding shares, illustrates the impact of liquidity on stock price However,aggregate turnover (AT) is the name given to this metric Liquidity increases in directproportion to this index's value

Traded Shares,Total Shares

LIQ, =

Traded Shares is the total volume of shares traded during year t, and Total Shares isthe average total number of shares outstanding during the year for the company

2.2.1.3 Roles of stock liquidity

The stock liquidity is an essential factor in financial markets It refers to the ease andlow-cost ability of a stock to be traded on the stock exchange Stock liquidity determinesthe speed and volume of trading in the market and affects the stock price state

The higher the stock liquidity, the easier it is for the stock to be bought and sold on

the market, which creates confidence among investors and increases the potential for

attracting more investment capital into the company High liquidity also helps to minimizerisks and increase transparency in stock trading In contrast, low liquidity leads toinaccurate and unstable stock prices, causing a lack of transparency and loss of investortrust in the company Thus, stock liquidity is a crucial factor in creating a robust and

attractive stock market for investors and contributes positively to the economy.

According to Amihud et al., (1986), the bid-ask spread is a widely used measure ofliquidity, with stocks having lower bid-ask spreads being more actively traded andtherefore easier to buy and sell

Additionally, according to numerous studies, stock liquidity provides many benefits

such as: reducing the cost of equity capital (Diamond et al., 1991), improving stock prices

to reflect the company's true value and increasing overall enterprise value (Fang et al.,2009) However, the authors warn that focusing too much on the positive effects ofliquidity may lead investors to prioritize short-term gains over the true value of the

company.

2.2.2 Overview about stock price crash risk

2.2.2.1 Definition of stock price crash risk

The occurrence of stock price crash risk is one of the critical factors that investorsneed to consider and observe before trading on the stock market, a thorough

understanding of stock price crash risk is extremely essential in portfolio investment, risk

management and prudential supervision for stakeholders (Vo., 2020) The risk of stockprice crash risk has increasingly attracted attention from researchers, investors, and

19

policymakers According to Sezgin et al., (2021), the risk of stock price crash risk is defined

as the possibility of sudden and severe price drops of stocks in the stock market, typicallystems from internal or external factors of company such as negative news, financial orlegal issues, low liquidity or unforeseeable events

2.2.2.2 Measurement of stock price crash risk

Following Chauhan et al., (2017) and Kim et al,(2011), the authors used twoalternative proxies for the idiosyncratic risk: the log of down-to-up volatility of daily stock

returns and the negative conditional skewness of daily stock returns From the extended market model shown below, we calculate the idiosyncratic daily returns as the natural log

of (1 + residual returns), indicated by W,

(i) |The expanded market model given in equation (1) is estimated

Rit = + PriRme-2 t+ BoiRme-1 + BsiRme + BaiRmeri + PsiRmese + €i2 (1)

Where Ri,t is the weekly return on stock i in week t, Rm,t is the market return, and

£l,t is the residual return Then, the firm specific weekly returns are calculated as Wi,t %

In (1 p éi,t)

(ii) The NCSKEW (negative coefficient of skewness)

NCSKEW is calculated as the negative of the third moment of firm-specific weeklyreturns over the standard deviation of the firm-specific weekly returns raised to the thirdpower for each year and each firm given in Equation (2)

NCSKEW,y = — _ trứt-Đ Swi _ (2)

(~1)-2)ŒW2)2)

(iii) DUVOL (down-to-up volatility) of firm-specific weekly returns

DUVOL is the natural logarithm of the ratio of the standard deviation of firm-specific

weekly returns on the weeks with firm-specific returns below the annual mean, calleddown weeks, to the standard deviation of the firm-specific weekly returns on the weekswith firm-specific returns above the annual mean, called up weeks, given in Equation (3)

_ 2

DUVOL;» = log f2 Devout} (3)

(na—1)5upWậ,

2.2.2.3 Negative impacts of stock price crash risk

Stock price crash risk is a direct cause of losses for investors and the entire market.This risk has a negative impact on individual investors, organizations, companies, and themarket as a whole

Several studies have shown that the risk of price crashes affects the liquidity of themarket Investors lose confidence when investing in a risky market that is prone to losses,

20