Liquidity and firm performance: Evidence from the MENA region

How can individual investors infer value relevant information from publicly available data in information scarce emerging markets? Using a large dataset from the MENA region (Morocco, Egypt, Saudi Arabia, United Arab Emirates, Jordan, Kuwait, and Bahrain), we document a significantly positive relationship between liquidity and firm performance. We argue that higher level of information asymmetries in the MENA region exposes stock market participants to excessive risk, and therefore any mechanism that can provide them with opportunity to lower this risk (by exiting the stock) is valuable. Our results also show that this relationship is stronger in the civil law countries than in the common law countries. Civil law countries have weaker investor protection mechanisms, thereby exposing investors to more risk. As a consequence, liquidity is valued more in the civil law countries relative to the common law countries.