Influence of Liquidity and Psychological Factors on Penny and Non-Penny Stock Returns in the Malaysian Stock Market

This study examines the influence of liquidity and psychological factors on penny and non-penny stock returns in the Malaysian stock market. The existence of higher penny stock returns in the Malaysian market in the recent years raises the concern of whether penny stocks represent an unexplored investment opportunity or are a rightfully ignored option for investment activities due to the potential influence of liquidity risk premium and psychological factors. Employing monthly panel data of 192 penny firms and 394 non-penny firms from 1 st January 2020 to 31 st January 2023, this study uses penny and non-penny stock returns in the Malaysian stock market as its dependent variables. Two psychological factors (affective biases and cognitive heuristic) are the main independent variables of this study. Affective biases include sentiment, mood, emotion and cognitive heuristic refers to overconfidence. Meanwhile, the five-factors as proposed in Amihud (2002) namely risk, firm size, book-to-market, momentum, and liquidity are the other independent variables of this study. Statistically, this study will conduct a Generalized Method of Moments (GMM) test as analysis method to achieve its research objectives.