Influence of Information Asymmetry, Illiquidity and Transaction Cost on Asset Price in the Nigerian Exchange Limited

Abstract

Financial frictions are resistances to the well-functioning of stock exchanges, and accordingly, cause asset prices to deviate from their fundamentals or intrinsic (long-run or equilibrium value.). Against this backdrop, this paper investigates whether information asymmetry, liquidity constraints and transaction cost of trading influence asset prices, utilizing evidence from the Nigerian Exchange Limited (NGX), for the period 1988-2022, and robust econometric GMM estimation approach. The empirical findings revealed that information asymmetry and illiquidity have significant negative impacts on asset prices. Transaction cost, on the other hand is positively related to asset pricing, an indication that investors are more concerned with the marginal expected return on investment even at a higher cost of investment transaction. We further find evidence that externally generated and transmitted shocks, proxied by economic vulnerability dummy is negatively and significantly associated with asset prices. In view of the forgoing findings, the study recommends the creation of financial investment environment that supports the enforcement of contracts through the reduction of the costs of transaction and information acquisition, as well as good corporate governance. Robust shocks-mitigating measures, including economic resilient policy responses to address external vulnerabilities and uncertainties as well as strong regulatory and institutional mechanisms to make the operations of the financial market efficient and stable for global competitiveness are also imperative.

Keywords: Financial frictions, Information asymmetry, Illiquidity, Transaction cost, GMM