Stock Liquidity Measured by Relative Bid–Ask Spread and Its Role in Explaining Financial Leverage Under Financial Constraints

In emerging markets, firms often face severe financial constraints and information asymmetry, limiting their access to external financing and increasing reliance on debt. Stock liquidity can mitigate these frictions by reducing transaction costs and enhancing market transparency. This study examines the effect of stock liquidity measured by the relative bid–ask spread on financial leverage, and the moderating role of financial constraints among firms listed on the Tehran Stock Exchange during 2014–2023. Using panel data from 1,500 firm-year observations and fixed effects regression models, the results reveal a significant negative relationship between stock liquidity and leverage. Moreover, financial constraints strengthen this negative link, indicating that constrained firms are more sensitive to liquidity conditions when making capital structure decisions. These findings align with theories of asymmetric information and investment constraints, suggesting that higher liquidity enables firms to rely more on internal financing and less on external debt. The study contributes to capital structure literature in emerging markets by emphasizing the interaction between liquidity and financing frictions. Practically, the results provide insights for managers, policymakers, and investors: enhancing transparency and monitoring financial constraint levels can improve market efficiency and guide firms in optimizing their financing strategies