Price behavior of small and medium enterprises on the Saudi stock exchange in the face of market illiquidity

Abstract

This research examines the impact of market illiquidity on asset prices. This topic has been widely discussed in the U.S. market, particularly in relation to the effects on small-caps and large-caps. The objective of this study is to investigate the relationship between returns and market illiquidity shocks on the Saudi stock exchange, with a specific focus on medium and small capitalizations. Small and medium enterprises (SMEs) in Saudi Arabia play a significant role in driving economic growth, comprising 99.5% of the private sector. Given their importance in diversifying the Saudi economy and enhancing non-oil sectors, it is crucial to examine how the stock prices of these enterprises respond to market liquidity issues. To achieve this, illiquidity shocks are estimated for the Saudi stock exchange, followed by an assessment of the overtime relationship between SME returns and the estimated shocks using seven industrial group portfolios. The estimation results validate previous findings and demonstrate that illiquidity shocks in the Saudi market lead to lower prices for all SMEs, irrespective of their industrial group. Moreover, I explore whether this relationship differs between medium and small enterprises. Previous studies have suggested that market illiquidity shocks have a more pronounced impact on the stock prices of small capitalizations compared to large capitalizations. However, my estimation results indicate that the negative effects of illiquidity shocks on stock prices do not significantly differ between medium-sized and small-sized enterprises. This finding is attributed to the lack of substantial disparities in the time-series returns of both portfolio sizes.