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

366-368

TI Journals

International Journal of Economy, Management and Social Sciences

www.tijournals.com

ISSN:
2306-7276

Copyright 2015. All rights reserved for TI Journals.

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 dont 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

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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.

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 companys 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. Subhypotheses 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

N
Normal Parameters a,,b
Kolmogorov-Smirnov Z
Asymp. Sig. (2-tailed)

Mean
Std. Deviation

Percentage of free
float shares
70
12.819571
6.8127909
0.608
0.854

Current
ratio
70
0.363950
0.1855159
0.840
0.481

Quick Ratio
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.

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

368

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 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

Percentage of free
float shares
1
70
0.122
0.000
70
0.156
0.002
70

Current
ratio
0.122
0.000
70
1

Quick Ratio
0.156
0.002
70

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
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