Product market power, informational asymmetries and stock liquidity: Evidence from Indian firms

This study investigates the impact of product market power on stock liquidity against the backdrop of rising market power and global financial market integration. It also explores the nonlinearities associated with this relationship. In addition, we examine the interaction of firm size and leverage with market power and how it shapes the market power–stock liquidity relationship. The study uses a firm-year panel of 865 NSE-listed firms from India over the period 2011–2021, and employs panel regression techniques to analyze these. Product market power is measured using price-cost markups, and stock liquidity is captured using the inverse of the illiquidity ratio and share turnover. The analysis indicates an inverted U-shaped relationship between product market power and stock liquidity. Results also highlight the role of informational asymmetries and strategic opacity in this relationship. Further, the asymmetric role of leverage and firm size in the influence of product market power on stock liquidity is confirmed. The impact of product market power on stock liquidity and the moderating/mediating influence of informational asymmetries and leverage can have significant implications for the design of policies by the firms and authorities that monitor the competitiveness of markets.