The presence of higher penny stock returns in the Malaysian stock market in recent years may have attracted the attention of investors. On the other hand, it indicates a liquidity risk premium, implying a higher risk associated with the stocks. Employing yearly panel data of 434 penny firms and 319 non-penny firms from 1st January 2019 to 31st December 2023, this study aims to explain penny stock returns versus non-penny stock returns in the Malaysian stock market from a liquidity perspective. The dependent variables are penny and non-penny stock returns in the Malaysian stock market meanwhile, the main independent variable is liquidity. The other independent variables consist of the factors in the five-factor model; risk, firm size, book-to-market, and momentum. Further, this study employs three static panel data, namely Pooled Ordinary Least Squares, Random Effects Model and Fixed Effects Model. The finding shows that liquidity, book-to-market, and momentum influence penny stock returns significantly. Simultaneously, liquidity, firm size, and momentum influence non-penny stock returns in the Malaysian stock market.   

Keywords: Liquidity, Penny Stock Returns, Non-Penny Stock Returns, Malaysian Stock Market, Five-Factor Model