Investigating the Mediating Roles of Information Asymmetry and Illiquidity Related to Cluster Trading in the ‎Relationship between Noise Trading and Market Efficiency in Tehran Stock Exchange (TSE)‎

This study aimed to investigate the effects of information asymmetry and illiquidity related to cluster trading on market efficiency and examine the mediating roles of these two variables in the relationship between noise trading and market efficiency. To measure the information asymmetry, Adj PIN and illiquidity related to cluster trading obtained from PSOS models were used. Also, market return based on trade volume imbalances was utilized as the indicator of market efficiency. The sample include 146 companies, which were listed in Tehran Stock Exchange between 2014 and 2020. The results showed significant inverse effects of information asymmetry and illiquidity related to cluster trading and market return. However, the effect of illiquidity related to cluster trading on market return was stronger than that of information asymmetry. In addition, the findings showed that noise trading had direct and significant effects on information asymmetry and illiquidity related to cluster trading. Thus, the relationship between noisy trading and market return through information asymmetry and illiquidity relevant to cluster trading, as well as the mediating roles of these two variables, was confirmed.IntroductionBased on the previous research, liquidity is one of the fundamental factors affecting market efficiency and proper pricing of the capital assets (Wei, 2018; Ibikunle et al., 2016; Han, Tang, & Yang, 2016; Liu et al., 2019). On the other hand, one of the characteristics of an ideal efficient market is the lack of trading cost consequently leading to high liquidity. Stock liquidity can be suggested as an indicator for market return. It is broadly incorporated into the investigation of the effective factors presenting positive information (Rahmani, Hosseini, & Rezapour, 2019). Information asymmetry affects market value of the companies listed in the stock market (Muslim, 2021 & Setiawan). It can lead to wrong financial decision-makings of the management and reductions of the shareholders` wealth (Aflatooni, 2020). Information asymmetry concerning adverse selection occurs when one party of the deal enjoys more valuable information than the other party over the dealing process and this leads to an increase in trading cost (Hu & Prigent, 2017). Another important impact of information asymmetry on the market is the orientation of market performance toward disruption and inefficiency because the asymmetric information can affect market price fluctuations and the assets prices. Information asymmetry can reduce efficiency and prevent market formation in extreme cases, which make the two parties to the transaction lose in the end (Miskin, 2015). In the modern financial world, a great deal of trades is done unknowingly by disruptive traders, who enjoy a limited trading strategy based on rumors and other people's mere advice. These disruptive traders are called noisy traders whose major feature is the lack of adequate information in the transaction, i.e., their buying and selling are independent from the inherent value of the traded property (Han, Tang, & Yang, 2016; Peress & Schmidt, 2021). Nonetheless, we cannot say whether a trader has enjoyed his/her access to information in a particular trade only based on the empiric and routine levels of information about trades. In this circumstance, from the type of information, researchers usually speculate whether the trades have been based on information or not (Chung et al., 2013). Noises have always existed in financial markets. These noises, which are based on daily fluctuations in the stock price, are caused by factors like the spread of news or information, mass behavior, and/or fundamental parameters. Based on one important assumption of behavioral theory, trades of these noisy traders are not independent from each other and have a systematic correlation. Therefore, we cannot neglect their roles in and impacts on financial markets and construe them as the trivial part of the process of investing in those markets (Saranj et al, 2018). Information asymmetry is related to price clustering and cluster trades. In an efficient ideal market, price clustering and cluster trades are at their minimum possible levels. By cluster trades, we mean noisy traders’ tendency to do trades when there is no real and good quality information. With the increase of noisy trades in a time period, even knowable traders tend to trade more, while this gives noisy traders more incentive to do more trades, which in turn, leads to an increase in trade cost and a decrease in market efficiency (Duarte & Young, 2009). The findings of a study showed that due to the existence of noisy traders and spread of confidential information, knowable traders trade in a particular period after the spread of information and reduce their trades after its gradual effect on prices. This leads to the reduction of liquidity (market illiquidity) (Foster & Viswanathan, 1990). Therefore, it is expected that stocks go higher with information asymmetry, while the higher levels of cluster trades lead to less efficiency of the market (Hu & Prigent, 2019). Market efficiency is affected by several stock features, such as the market value, price volatility, trading volume, institutional trade, and trading cost. It is also influenced by trading cost due to information asymmetry and illiquidity due to cluster and noisy trades. Since no research has been done to investigate the impacts of information asymmetry and illiquidity concerning cluster trades on market returns in Iran Stock Exchange, this essay aimed to determine if the impacts of information asymmetry and illiquidity concerning cluster trades on the returns of companies listed in TSE market were based on a model that could show the degree of market efficiency and intended to answer these questions: do information asymmetry and illiquidity concerning cluster and noisy trades affect the market? Is the meditating role of illiquidity concerning cluster trades in the relationship between noisy trades and market returns confirmed in Iran stock exchange market? Method and DataTo test the research hypotheses, 146 companies among those listed In Tehran Stock Exchange during the years of 2014-2020 were examined. To this goal, a multivariate regression model and pooled data were utilized. FindingsThe results displayed the significant inverse effects of information asymmetry and illiquidity related to cluster trading and market returns. The effect of illiquidity related to cluster trading was stronger than that of information asymmetry. In addition, the findings revealed that noise trading had direct and significant impacts on information asymmetry and illiquidity related to cluster trading. Thus, the relationship between noisy trading and market return through information asymmetry and illiquidity relevant to cluster trading and the mediating roles of these two variables were corroborated. Conclusion and discussion The results demonstrated that noisy trades reduced market efficiency by enhancing the trading and illiquidity costs due to information asymmetry and cluster trades, respectively. Information asymmetry and illiquidity affected market efficiency as independent variables, which gave us some evidence on the information motivation model. When new information enters the market, trades increase due to the initial advantage and motivation of using information as long as it is integrated into the stock price. However, the impact of information on the prices in the period of no new good-quality information (increase of noisy investigators’ trades due to concerns about liquidity) leads to enhancement of trading costs concerning illiquidity, which in turn, results in the reduction of market efficiency. Therefore, the supervising institution must pay attention to such factors as the accounting quality and information disclosure of the companies listed in TSE, as well as promotion of their supervising mechanisms in general. They should also take steps to making some policies for the growth and development of financial institutions active in the capital market like investment consulting firms, investment funds and companies, portfolio management, and financial information processing companies. In addition, the investors should pay attention to the management team qualities of companies responsible for preparing financial statements, company size, disclosure level, and growth opportunities as the factors affecting information asymmetry.