The Impact of Corporate Efficiency and Earning Volatilety on the Relationship between Stock Liquidity and Cost of Ownership - Applying to Companies Listed in the Saudi Market

Study Objective and Methodology: This study aims to analyze the relationship between stock liquidity and equity cost and the modified role of firm efficiency and earnings volatility, using data from a sample of 100 companies listed on the Saudi Arabia stock market during the period from 2012 to 2019. The researcher measures the stock liquidity based on Trade Volume (as a direct measure), the bid and ask stock prices differences (as indirect measure). The earnings volatilety was also measured by the abnormal returns level, moreover, the dividend model was used in calculating the equity cost (EC).
Study Results: The results show that there is a negative significant effect of the firm efficiency on the bid and ask stock prices differences, and there is a positive significant effect of bid and ask stock prices differences on EC, which reflects the high cost of investments in light of the lack of stock liquidity. In other words, the high return rate required by investors with is increased in the stock's liquidity weakness. On the other hand, there is a negative significant impact of the bid and ask stock prices differences on EC in the presence of the firm efficiency, which reflects its role as a modifying variable, and it's an important tool to compensate for the weak stock liquidity from Investors' perspective.
Moreover, the results show that there is a negative significant effect of abnormal returns on the trade volume, and there is a negative significant effect of the trade volume on the EC, which means that the high trade volume enables firms to obtain the necessary funds at the lowest possible cost and attract new investors. On the other hand, there is a positive significant effect of the stock trading volume on the EC in the presence of abnormal returns, which reflects its role as a modifier, and it's a negative indicator in the investors’ evaluation and interpretation of the stock’s high liquidity, which drives firms to make more dividends to facilitate obtaining the necessary financing by investors.  
The study Importance and Contribution: The study contributes to the accounting literature by providing evidence on the importance of improving stock liquidity in reducing the cost of capital. In addition, it highlights the important role of firm efficiency in reducing the EC, especially in the case of poor stock liquidity. It also contributes to focusing attention on the increase in the EC, despite the increase in the stocks' liquidity, especially with increase in the stock's returns volatility.