The Relationship between the Percentage of Free Float and Liquidity Ratios Hassan Balali* Visiting Professor of Islamic Azad University, Damghan Branch, Iran. Khadijeh Binaeian Damghan Islamic Azad University graduate student, Iran. Fatemeh Mohammadi Damghan Islamic Azad University graduate student, Iran. Somayeh Abdollahzadeh Damghan Islamic Azad University graduate student, Iran. *Corresponding author: hassanbalali@yahoo.com Keywords Abstract Percentage of Free Float Quick ratio Current ratio

This study is going to recognize the relationship between the percentage of free float with the current and quick ratio. In this study, information was collected about 70 accepted companies listed in Tehran Stock Exchange and reviewed. Research hypotheses were tested by Kolmogorov-Smirnov test and Pearson's correlation coefficient. For this purpose, the percentage of free float (independent variables) with current and liabilities ratio (dependent variables) were studied. The results suggest that in sample, there is a significant positive correlation between the percentage of free float and current debt ratio.

1. Introduction Due to the financial crisis of investment companies and other users of financial statements, they found that with the loss of confidence among investors, the investment rate has changed direction and they will be faced with a sudden crash by removing the investment and reducing the firm's financial resources. As a result, companies are trying to attract more investment capital in the financial markets on which this should be the correct pattern of the status and performance of the business to be put at the disposal of investors. Here we need an indication that shows the stock market and the impact of trade (Mokarrami, 2006). Achieving economic growth and increasing people's willingness to invest need to adopt policies to achieve an appropriate return on new investment significantly. Stocks are great choices for investors, because they choose their own shares regarding the degree of risk and expected results that are obtained from the market. Tehran Stock Exchange for the first time in the summer of 2003 with the announcement of a 15% free float for all firms, according to the daily trading volume defined that if the daily trading volume of shares of a company is more or less than 15% of total capital divided by 250 days, then the price per share can increase or decrease for 5%. The purpose of this contract is changes in stock prices of companies that were the major shareholders who had no interest in buying and selling stocks. With this control it was expected to increase the supply and sale of shares and hence the ability to stock liquidity will be better and low risk. Free float share is the company's stock percentage traded on the foreign exchange market so that investors can buy and sell the stocks. If a company's free float is high, the market is more cash and lower price volatility and therefore, reduced investment risk. Also, the proportion of low free float indicates shallow market shares and low free float means that in the market, there is little equity and this reduces liquidity and investors tend to avoid that stock because they do not like the lack of liquidity. In accordance with Article 17 of Exchange Regulation in Tehran Stock Exchange trading company, free float of the company share is part of of shares of the company that holders are ready to sell their shares and they don’t tend to participate in company management with that portion of the share (Trading companies Tehran Stock Exchange Regulations Act 20/09/2004). Free Float stock Index is important in companies and organizations decisions; therefore it is necessary to continuously monitor the regulatory agencies (Ahadi Serkani, 2006). Financial ratios can be used for determining the value of Companies securities, credit analysis and evaluation of financial operations. These ratios can be classified into four groups, the liquidity ratio is one. Free Float percentage can be correlated with the ratio, the present study suggests the possibility of such communication. Securities analysts often used to survey financial ratios to assess the company in order to invest and examine the suitability of stocks and bonds for investment performance (Taghavi, 2006). On the other hand, the percentage of free float percentage can have a significant impact on the financial ratios particularly liquidity. Therefore, research on understanding the relationship between the percentage of Free Float and liquidity ratios is a major issue as one of the financial ratios of listed companies in Tehran Stock Exchange during the last years. There are much information in a company, for the correct application and understanding of this information, they analyze financial statements through the analysis of financial ratios to get the results (Taghavi, 2002). The importance of the free float is such that most of the countries use this index for the market adjustment factor. If the company Free Float is high, its market is more cash and less investment risk. So, the understanding of the relationship between the percentage of Free Float and financial ratios can be useful in decisions and assessing the financial health of the users of financial statements to assist in decision making. 1.1 Literature Chan et al. (2001) studied on the relation between Free Float stocks with liquidity after government intervention in Hong Kong market; they concluded that by reducing Free Float stock through government intervention, market liquidity got less and trading volume dropped and had a negative impact on market psychology. Hong-fei, Zhou-si and Ji (2006) studied on the relationship between the percentage of Free Float and ratio of P / E in China and found that there is a linear relationship between P / E and free float stock in the semi-parametric model comparing linear model to estimate the return on equity and creates liquidity. Also they showed that increasing the percentage of free float of companies reports more favorable P / E ratio. Garbony (2007) did the most comprehensive study on Philippine Stock Exchange based on the free float and

Int. j. econ. manag. soc. sci., Vol(4), No (3), March, 2015. pp. 366-368

TI Journals

International Journal of Economy, Management and Social Scienceswww.tijournals.com

ISSN:

2306-7276

Copyright © 2015. All rights reserved for TI Journals.

called exchange companies as the main barometers of local price changes. In Philippine Stock Exchange, for inclusion of a company in exchange, they need criteria such as free float, float market capitalization, merchantability average daily trading value and volume flow rates. Newman and Vataman (2001) studied the effects of volume and price-adjusted index of Dow Jones. They concluded through changes test in demand using partial substitution and price pressure hypothesis that the implementation of the free floats causes reducing the demand for large European companies’ stocks. Manny (2004) studied on the Tehran Stock Exchange index adjusted by the Free Float to select a correlation between index changes with changes in the volume of transactions and the most appropriate indicators and correlation test results showed that companies sizes with free float are not related and fluctuation of stock price per share in the short term does not affect the company. Ahadi Serkani (2006) assessed the relationship between ownership structure and financial structure and economic growth in the Tehran Stock Exchange to assess the ownership structure of three factors: the number of shares traded on the trading frequency, concentration of ownership and use of Free Float. Research findings only confirmed relation with Free Float. 1.2 The operational definition of concepts and variables The ratio means comparing the two digits together. If these figures are referred to the financial statements, above ratio is called financial ratios and are based on balance sheet and profit and loss figures. Items in financial statements should be together and comparative analysis of financial ratios is used to accomplish this. From shareholders point of view, the ratio should be at a level that causes the flow to net income or earnings per share are highest during the period. Liquidity ratios show profit unit power to perform its obligations under short-term cash assets. 1.2.1 Percentage of Free Float share Free Float share is number of company’s shares that is expected to be available in the near future to current prices for buyers Or part of the shares of a company that is negotiable without any restrictions, if the result of the ratio number of shares of non-negotiable to total company stock is reduced from number one, the percentage of free float is obtained. This definition first was introduced in 1989 by Salmon smith Barney global equity index (Ide, 2001). In another definition, Free Float stock is a stock not belonging to the strategic stakeholders (government, public companies, foreign ownership, equity securities, the stock board members and managers, workers and employees of the Company shares, shares held by institutions and foundations, shares held by banks and insurance). Percentage of shares owned by the government and is not intended to offer it in the short term, this type of shares is not calculated in free float. But not strategic share is regarded as the free float of shares. 1.2.2 Current ratio Current ratio is obtained by current assets divided by current liabilities. 1.2.3 Quick ratio Measures profit unit power for short-term obligations from financial assets and is obtained through dividing current assets minus inventories on ongoing debt. 1.3 Basic questions and research hypotheses The big question is whether there is a relation between percentages of financial ratios with free float? In this research, we are going to find such a relationship, so the research hypothesis is formed as follows: 1.3.1 Main hypothesis There is a significant correlation between the percentages of firms free float listed in Tehran Stock Exchange with financial ratios. Sub-hypotheses were developed to assess meaningful relationship. 1.3.2 Sub-hypothesis There is a relationship between the percentages of free float in firms listed in Tehran Stock Exchange and current ratio. There is a relationship between the percentages of shares in listed companies with quick ratio.

2. Methodology The population of this research is firms listed in Tehran Stock Exchange in 2003. The sample consisted of 70 companies listed in Tehran Stock Exchange published by the Tehran Stock Exchange in 2003. In this study, to investigate the relationship between the independent variable (% of free float) and dependent variables (current and quick ratio, to assume normality, Kolmogorov-Smirnov test assumption was used and Pearson's correlation coefficient was used for variables coefficient.

3. Results We want to know whether there is a significant correlation between the percentage of free float and gross profit margin or not? So for this reason, the Pearson correlation coefficient was used. First the variables should be normally distributed; a linear relationship is established between them. The results of normality are provided in table 1:

Table 1. One-Sample Kolmogorov-Smirnov Test

Percentage of free float shares

Current ratio

Quick Ratio

N Normal Parameters a,,b

Kolmogorov-Smirnov Z Asymp. Sig. (2-tailed)

Mean

Std. Deviation

70 12.819571 6.8127909

0.608 0.854

70 0.363950

0.1855159 0.840 0.481

70 0.467488

0.1645624 0.720 0.415

Since a significant percentage of free float and current and quick ratios are both in the top 5%, hence the assumption of normality of the data is confirmed.

367 The Relationship between the Percentage of Free Float and Liquidity Ratios

International Journal of Economy, Management and Social Sciences Vol(4), No (3), March, 2015.

Table 2. Pearson correlation coefficient, the free float and current and quick ratio

Percentage of free float shares

Current ratio

Quick Ratio

Percentage of free float share Normal Parameters a,,b

Current ratio

Quick ratio

Pearson Correlation Sig. (2-tailed)

N Pearson Correlation

Sig. (2-tailed) N

Pearson Correlation Sig. (2-tailed)

N

1

70 0.122 0.000

70 0.156 0.002

70

0.122 0.000

70 1

70

0.156 0.002

70

1

70 According to the results of Table 2, the Pearson correlation coefficient, there is a direct relationship between the current and quick ratio and free float. The research hypotheses were confirmed.

4. Conclusion Because the majority of studies in this regard show the relationship between free float and the liquidity and capital markets are efficient, So, this study examines the relationship between the percentage of free float and liquidity ratios. This research has two hypotheses that show results of statistical analysis of the first hypothesis; there is a significant positive correlation between the percentage of free float and current ratio. This means that the higher the ratio of current assets to current liabilities increased by diminishing the amount of free float. The result of the second hypothesis is applied; there is a positive correlation between the percentages of free float and quick ratio. Since the increase in free float and increased liquidity, this is one of the ways to attract investors; as a result, the current ratio and quick ratio are to achieve the desired level, causing serious investment in current assets and attract investment.

References Ahadi Serani, Seyed Yousuf (2006). Assessing the relationship between economic growth and financial structures and ownership structure of listed companies in

Tehran Stock Exchange. PhD thesis, Tehran University of Medical Sciences, Tehran, Iran. Chan, Kalok., Chan, Yue-Cheong and Fong, Wai-Ming (2002). Free Float and Market Liquidity: Evidence from Hong Kong Government’s Intervention. Hong

Kong University of science and technology. Gaborni, Joel (2007). Indices of the Philippine Stock Exchange (PSE). www.pse.com.ph. Hong-fei,jin., zhou-si, chen and ji, pan (2006).An Empirical Study of the Relationship between Free Float Ratio and P/E Ratio in Chinese Stock Market. journal

of Management Science and Engineering, 1458-1461. Manny, Laeh (2004). Adjusted Tehran Stock Free Float. Master Thesis, Institute for Research and Education Management and Planning. Mokarrami, Yadollah (2006). Principles of corporate strategy. Journal of Accounting, 32, 40-45. Neeumann, R. and Voetmann, T (2001). Float Capitalization Index Weight in Dow Jones Stoxx: Price and Volume Effect. Given at the University of

Pennsylvania, [http: //Wharton. upenn.edu]. Ide, Shingo (2001). Considering the Free Float- Adjustment of the TOPIX: The Need for a New Index and Possible Effects of Implementation, NLI Research

Instiute, 45(150), 76- 92. Taghavi, Mahdi (2002). Financial Management (1). Payame Noor publication, Tehran, Iran. Taghavi, Mahdi (2006) Financial Management (2). Payame Noor publication, Tehran, Iran.

368 Hassan Balali *, Khadijeh Binaeian, Fatemeh Mohammadi, Somayeh Abdollahzadeh

International Journal of Economy, Management and Social Sciences Vol(4), No (3), March, 2015.