If asset liquidity can quickly lead century old businesses like Credit Suisse or tech giants like Silicon Valley Bank into bankruptcy, then as China's securities market enters the era of comprehensive registration, small and medium-sized listed companies will face huge challenges brought by liquidity premiums.

The concept of "liquidity premium" was proposed by Amihud and Mendelson in 1986, and its core idea is that the easier an asset is to be liquidated, the higher the price investors are willing to pay. In other words, an increase in liquidity increases the value of assets, while a decrease in liquidity decreases the value of assets. Empirical studies both domestically and internationally have shown that there exists a liquidity premium phenomenon in both domestic and foreign stock markets.

The role of secondary market investors

Who provides liquidity for the stock market? Of course, they are stock investors in the secondary market, including institutional investors and retail investors.

Traditional economic theory holds that the impact of value on price is unidirectional, with stock prices fluctuating around the value of listed companies. However, many major shareholders or actual controllers of listed companies often overlook or fail to realize the role and function of secondary market investors in creating company value.

According to the theory of value management, we divide investors in the secondary market into active shareholders and passive shareholders. We will not delve into how active shareholders can participate in company value creation here, but even passive shareholders, such as individual investors known as "leeks," indirectly create value for listed companies by providing liquidity through stock trading.

Measurement indicators of liquidity

According to our value management theory, the measurement indicators of liquidity mainly include the following aspects:
1. Trading volume
2. Transaction amount
3. Turnover rate
4. Absolute price difference
5. Relative price difference
6. Amplitude

The Importance of Liquidity

Soros' reflexivity theory points out that the thoughts of stock market traders and the events they participate in (i.e. expectations of the value of listed companies) influence and determine each other. For example, retail investors have full confidence in a listed company and actively buy and sell its stocks, thereby increasing liquidity, turnover rate, and trading volume, and driving up the stock price.
As a result, the increase in the company's market value will reduce financing costs and enhance its strength in external mergers and acquisitions. Meanwhile, the rise in stock price will also enhance the company's brand reputation and reduce marketing costs. If the company has equity incentives, employee motivation will also increase due to the rise in stock prices. The supervision of external shareholders can also reduce the agency costs of the company and improve its governance structure. This series of positive feedback will promote the improvement of the company's operational performance, drive fundamental improvements, and ultimately achieve the expected company value for investors.

Who achieved Amazon

Taking Amazon as an example, how did it develop from a small bookstore to a global e-commerce giant? Amazon suffered consecutive losses in its early days, but investors remained optimistic about its prospects. This expectation prompted more people to buy its stock, which in turn boosted the company's market activity and stock price. The increase in liquidity and market value brought about by the rise in stock prices has had a positive impact on the company, including reducing financing costs, enhancing brand influence, and reducing management costs. These factors interact to drive Amazon's long-term development.

case summary

With the implementation of the pilot registration system, the number of individual investors has been increasing year by year, but the trading share has been decreasing year by year, and the trend of investor institutionalization is becoming increasingly evident. Small and medium-sized listed companies face the risk of gradually losing market liquidity, which may lead to their marginalization or even delisting. Therefore, listed companies should respect individual investors, value the role of the capital market, actively attract relevant stakeholders to participate in the company's value creation, and achieve a virtuous cycle of development.
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I hope that through this article, more people can understand the importance of liquidity premium and draw attention to the challenges faced by small and medium-sized listed companies.