Abstract
This paper examines whether the relationship between the level of liquidity and stock returns during this
period in Bursa Malaysia (KLSE) are affected by the implementation of capital controls by the Malaysian government
following the 1997 Asian financial crisis. The turnover ratio is used as a measure of the level of liquidity, with the
control variables being beta, size, book-to-market ratio, and momentum. The examination of the interactions between
beta, size, book-to-market, momentum, and turnover ratio with capital controls demonstrated that the impact of size
became smaller, the impact of book-to-market became more positive, and the impact of the level of liquidity became
larger after capital control implementation. Beta does not have a significant impact on returns, which remained
unchanged even after the inclusion of the capital controls interaction term. The impact of two out of the three
momentum terms became more positive. The reliability of the results was confirmed and verified through several
robustness checks. The impact of the turnover ratio on returns or the mediating effect of capital controls on the impact
of the turnover ratio on returns was not altered by the exclusion of the January data. The tests provide evidence of a
nonlinear relationship between the level of liquidity and stock returns even with the inclusion of the capital controls
interaction terms. When the level of liquidity is high, its impact on returns becomes significantly greater. In addition,
the study demonstrates that while a high level of liquidity may contribute favorably to stock returns, the variation in the
level of liquidity has a negative impact on returns, which becomes more negative following the implementation of
capital controls.
period in Bursa Malaysia (KLSE) are affected by the implementation of capital controls by the Malaysian government
following the 1997 Asian financial crisis. The turnover ratio is used as a measure of the level of liquidity, with the
control variables being beta, size, book-to-market ratio, and momentum. The examination of the interactions between
beta, size, book-to-market, momentum, and turnover ratio with capital controls demonstrated that the impact of size
became smaller, the impact of book-to-market became more positive, and the impact of the level of liquidity became
larger after capital control implementation. Beta does not have a significant impact on returns, which remained
unchanged even after the inclusion of the capital controls interaction term. The impact of two out of the three
momentum terms became more positive. The reliability of the results was confirmed and verified through several
robustness checks. The impact of the turnover ratio on returns or the mediating effect of capital controls on the impact
of the turnover ratio on returns was not altered by the exclusion of the January data. The tests provide evidence of a
nonlinear relationship between the level of liquidity and stock returns even with the inclusion of the capital controls
interaction terms. When the level of liquidity is high, its impact on returns becomes significantly greater. In addition,
the study demonstrates that while a high level of liquidity may contribute favorably to stock returns, the variation in the
level of liquidity has a negative impact on returns, which becomes more negative following the implementation of
capital controls.
Cuvinte cheie
stock returns
liquidity
capital controls
Asian crisis
Istoric articol
Publicat
26.06.2026
Informații autori
Citare recomandată
HALIL D. KAYA, ENGKUCHIK ENGKU N. (2026). CAPITAL CONTROLS, LEVEL OF LIQUIDITY AND STOCK RETURNS IN MALAYSIA. Constantin Brâncuși University of Târgu Jiu Economics Series, 1(3), 24–40. https://doi.org/10.65631/jes.3.2026.2
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