Revisiting the Impact of Stock Market Liquidity on Bank Liquidity Creation: Evidence from Malaysia

Moau Yong Toh, Christopher Gan, Zhaohua Li
  • Emerging Markets Finance and Trade, August 2018, Taylor & Francis
  • DOI: 10.1080/1540496x.2018.1496420

This article examines the impact of stock market liquidity on bank liquidity creation in Malaysia.

What is it about?

This article examines the impact of stock market liquidity on bank liquidity creation in Malaysia. Our results indicate that a stock market enhances the liquidity creation of banks both on and off the banks’ balance sheets when the market liquidity increases. Further analysis shows that the positive impact of stock market liquidity is evident on the liquidity creation of publicly listed banks as the banks’ cost of equity finance becomes cheaper. Our results are robust to the influence of the 2008 financial crisis and different estimation methods. Our results refute the traditional view that increased stock market liquidity “steals” banks’ business and crowds out bank liquidity creation.

Why is it important?

The first contribution of our article is to bridge the gaps in the stock market liquidity–bank liquidity creation research paradigm. Secondly, our article contributes to the financial and economic development literature by showing a liquid stock market as a possible channel through which banks facilitate economic development by creating more liquidity.

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http://dx.doi.org/10.1080/1540496x.2018.1496420

The following have contributed to this page: Christopher Gan and Dr Zhaohua Li