The Major Role In Liquidity Risk

Published Date: 02 Nov 2017

Chapter 1

1.0 Introduction

This chapter will focus on the background of study, research motivation, and significance of study, research objective, research question and hypothesis.

1.1 Background of study

Malaysia has developed a vision to become an industrialized country by 2020. An industrialized country means moving to higher incomes and living standards of the country. Occupy an important part in the development of industry during this period. Real estate in Malaysia plays an important role in the economy. Real estate are agencies in the housing between the buyer and the seller. Estate agency services provided products and services industry many features in common.

Liquidity risk is financial risk due to uncertain liquidity. Company might lose liquidity if the market rate is falls, it experience company might face expected and unexpected cash outflow. Liquidity risk is important for company to review financial performance without adversely affect company daily operation or financial condition of a company.

The major role in liquidity risk is to assess the need of funds to meet obligation and ensure the availability of cash fallow is in appropriate using the various sources of funds. The more capital attracts talent and enable to a business to have strong fund. Geographic, economic and political environment may affect the importance of liquidity risk, each country is different. Expand the scope of the global market, providing a unique opportunity to study the pricing of such cross-border or cross-regional change on liquidity risk. The degree of risk depends on the way of raising funds. It is important to study liquidity risk factor facing in each business in same industry to justify their risk-adjusted performance in vary company and in different situation. In additional, the importance of liquidity may be more pronounced, when the allegedly high liquidity in Malaysia.

1.2 Motivation of study

The motivation of study is to understand the factor might influence company liquidity risk is important for financing. Therefore, the study of mobility extends to the world market can provide a good opportunity to assess the role of liquidity as an additional source of systemic risk.

1.3 Research Objectives

General objective:

To investigate the factors affecting the liquidity risk of PLC on real estate industry.

Specific objectives:

To access the relationship between inflation and liquidity risk of PLC in real estate.

To access the relationship between size of company and liquidity risk of PLC in real estate.

To access the relationship between performance of company and liquidity risk of PLC in real estate.

1.4 Research Questions

What is the relationship between inflation and liquidity risk in real estate?

What is the relationship between size of company and liquidity risk in real estate?

What is the relationship between performance of company and liquidity risk in real estate?

1.5 Hypotheses

The hypotheses used to investigate in this study:

H11 : Inflation has impact on liquidity risk in real estate.

H12: Size of company has impact on liquidity risk in real estate.

H13 : Performance of company has impact on liquidity risk in real estate.

1.6 Significance of study

This research is benefit for investor, management and company to clearly seen a good concept of liquidity management and the factor can be influence the liquidity in a business. This can be clearly seen a good flow concept can helps company to have a better view in term on understand the factor of liquidity risk might facing in the future, as long as inflows are bigger or at least equal to outflows. Investor can analysis the fluctuation in the market in real estate sector, and have understanding for prevent losses in their investment. Management and is benefit in term on explore and identify the liquidity risk may incur during the daily and daily operation or future aim in a business. Lastly, companies can analysis the impact on liquidity risk and the gap between competitors in same industry. This paper mainly focuses on the funding liquidity of banks, given their importance in management the liquidity risk in the financial system.

1.7 Summary

In this study can investigate the factors affect the liquidity and result affecting the profitability performance of the PLC. However with this investigation can help the company to determine the risk may rise in a business then can prevent and improve the performance of company in future.

Chapter 2 Literature Review

2.0 Introduction

In this chapter will looking on the literature review on factor of liquidity risk in PLC in past studies.

2.1 Liquidity

Liquidity is effect performance of a business. Including three different types of liquidity risk is independent of traditional market risk: mobility covariance with the market liquidity (liquidity common), liquidity and the market rate of return covariance, covariance and market liquidity returns. The world price of liquidity risk( Lee, 2011).

The high liquidity business will have a better performance on expand business or future development. One of the characteristics of the real estate industry is illiquidity. While the transaction of buying and selling property is required on monetary and non-monetary on the buyer. Agents needs find information and pay searching cost on housing price it eventually costly in housing market (MacLennan, 1982). The housing market and real estate agent are at the relationship that liquidity in the market should have an impact on the performance of the real estate agency industry. It speculates on when new instruction are received, more liquid the market is the better the real estate industry can performance (Ke, 2008).

2.1.1 Inflation

Agent may receive commission after the house is sold. The agent commission is a part of house selling price so the commission is related to the measurement of the indicator of house price. The house price are set by the agent are depending on the market conditions and housing market and real estate rules (Driver, 1984). On another hand, an agents dealing with large transaction volume of house prices would mostly enjoy the scale economic; by contrast, the cost incurred in rural market might comparability higher (Findlay and Gibb, 1998).

Inflation of economic influence the house prices on the optimal weights on the expected inflation. The higher house prices increase has effect by calling rate hike weaker interest rates agent who shares. At the same time, through the output gap revenue to reduce the pressing these constraints under reduced pressure to demand further consumption. Based on the past study found that, when housing prices increase significantly, the inflation reduces this is due to the share of aggregate income. The result shows that when the weight reduction on the high housing inflation expectations. It is because the constraints receive small proportion of revenue, lost in term of the offsetting influence when interest rates are increase there will be more unfettered agents (Kajuth, 2010).

2.1.2 Size

One of the characteristic of real estate is size of housing market has an influence of the liquidity risk in the industry. The size of business depends on the total number of outlet in the organization which belongs to the business. Some researcher found that the relationship between business sizes with the company's operating results have produced conflicting results (Baldwin, 1998).

Ross (1993) stated that small firms are more profitably as compare with the larger business it is due to the vulnerable is changing business. Large scale business has difficulty in adjusting the structure in term on controlled market. However, increase in firm size is hypothesised that the risk aversion decreases, large companies are better able to take risks, because they have access to internal resources (Bannerjee and Duflo, 2000).

The result under survey in real estate agency customer marking decision are depends on the size of business it is most important impact that customer consider (Crozier and McLean, 1997). From past study, the reputation and firm size as a proxy and estate agent, which business mostly established brand named and provide mixed fee contract to buyer for example, fixed fee and deposit or percentages of house price (Bishop, 2004).

2.1.3 Performance

The past study of Crozier and McLean (1997) argue that business performance is insignificant coefficients that real estate agency industry general features of different strategy rather than competition. There are four most important factor might influence consumer choice estate agents attitude of the staff, the reputation of the company's range of services offered, staff appearance, is regarded as a low-cost much less importance. The inverse relationship between house prices to the business performance results arising that housing prices will be reduce liquidity of the housing market, it shows a negatively results of real estate agency have a negative impact. As compare with fees, market liquidity has more impact on affecting business performance. (Ke, 2008)

Some researchers argued establish feedback from customer is more importance; it can improve operating and relaxes financial constraints. When relationship between the non-financial stakeholders and companies are vulnerable, it significant affects high cash flow uncertainty for existing projects. The findings shows, the positive effect of liquidity on business performance has greater impact in high uncertainly of stocks liquidity which including operating income fluctuations and research and development. (Subrahmanyam and Titman, 2001)

Liquidity does not affect on manager myopia, it can improve the performance of the business. Although high liquid stock has high returns on the assets, the prices are similar on operating profit margin is less liquid stock. The he trade-offs of current profits and long-term prospects should lead to different prices, different level of liquidity of the stock as the operating margin. In summary, while improving incentive effects of stock-based compensation and internal investment decisions may lead a positive impact on liquidity. The feedback effect on liquidity improves business performance by increasing the efficiency of attract investor who make prices and given more information to stakeholder (Fanga, 2009).

2.5 Summary

Result of past studies show that the dependent variables is impact by the independent variables. Table below shows the framework model. This study intends to focus inflation, size and performance of the company.

Inflation

Size of company

Performance

Liquidity Risk

Chapter 3 Methodology

3.0 Introduction

In this chapter, it is to study about the sample of this research, sample size, sampling frame, data collection and measurements or ratio which is for secondary data.

3.1 Sample

There is limited time in this research, it is impossible to carry out 100% research all Public Limited Companies in this limited time. Therefore sampling chooses in this research is 30 PLC during the period from 2008-2011 will be taken company annual report from Bursa Malaysia.

3.2 Sampling frame

The sampling frame will be comprised on the PLC in Malaysia. The 30 listed company samples will select in real estate sector and listed in Bursa Malaysia. The focus in this research is the factor of liquidity risk such as the inflation, size and performance of a listed company.

3.3 Data Collection Method

The data collection will use second data collection method. From study annual report of the PLC to identify and analysis the data from statement of comprehensive income and statement of financial position. Such data are taken from Bursa Malaysia. In the annual report will focus in those factors that might affect the liquidity risk such as the inflation, size and performance of a listed company.

3.4 Measurement

Variables

Equations

Author

Liquidity Risk (LR)

Capital to total assets

Abdullah,A & Khan,A Q

Company Size Assets

Logarithm of total assets

Abdullah,A & Khan,A Q

Return on Assets (ROA)

Asset Utilization Ratio = Operating Income/Total Assets

Abdullah,A & Khan,A Q

Inflation

Final value – initial value / Initial value

World Bank (2013)

3.5 Method and Statistical Technique

The data analysis is undertaken by using SPSS statistics package. To further investigate the impact of the study variables on the business performance of estate agency, linear regressions are used in this research. Financial data from annual report was used to evaluate and calculated the liquidity risk management in real estate companies. Data are collected the influence of independent variable on dependent variable, to study the liquidity risk factor in PLC.

3.6 Summary

In this chapter the methodology are clear and understand the information of the factor in liquidity risk in the real estate by using data collection in 30 listed companies.