Liquidity Amplifies, Dividends Stabilize: Evidence from Stock Price Volatility in Indonesia’s LQ45 Index

Abstract

This study investigates the effect of stock liquidity and market value ratio on stock price volatility among LQ45 firms listed on the Indonesia Stock Exchange from 2020 to 2023. Grounded in behavioral finance and signaling theory, the research employs a quantitative approach using Partial Least Squares Structural Equation Modeling (PLS-SEM) on 45 firm-year observations selected through purposive sampling. Stock liquidity, proxied by Trade Volume Activity, positively affects volatility, reflecting the role of investor sentiment and trading behavior. Conversely, Dividend Yield, representing market value ratio, negatively influences volatility by signaling financial stability. The findings provide practical implications for investors, corporate managers, and regulators aiming to reduce volatility and enhance transparency in Indonesia’s capital market.