Liquidity, stock valuation metrics, and the entrepreneurial sector

What the paper says

Purpose This paper aims to investigate the role of stock liquidity in valuation metrics through market multiples by assessing how liquidity affects key valuation metrics such as enterprise value to sales (EV/Sales), enterprise value to EBITDA (EV/EBITDA), price to book value (P/BV) and price to earnings (P/E) in the European market. Furthermore, the moderating role played by the entrepreneurial context – represented by the micro, small and medium-sized enterprise (MSME) status – is tested. Design/methodology/approach The study applies an empirical analysis to a sample of European listed firms. Multivariate analysis is used to assess the direct impact of liquidity (proxied by the bid-ask spread) on valuation multiples, thereby incorporating both company fundamentals and market behaviour. LASSO regression is employed to confirm the robustness. Findings Results confirm a positive relationship between liquidity and market multiples, indicating that higher stock liquidity leads to an increase in overall valuation. Moreover, the moderation analysis indicates that this “positive liquidity effect” is most amplified among listed MSMEs, suggesting a potential distorting effect of market metrics among this category of companies. The analysis particularly highlights how entrepreneurial ventures may display stronger liquidity-valuation links. Research limitations/implications Findings advance knowledge on the liquidity-value debate by adding insights based on the entrepreneurial light. They also provide practical implications for investors, managers and financial analysts, regarding potential liquidity-distorting effects on valuation metrics. Originality/value This paper contributes to the business and finance fields, considering for the first time the moderating role played by MSME status.