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Asset liquidity and stock returns

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  • Ze-To, Samuel Yau Man

Abstract

We document the significant predictive power of firms' asset liquidity in the cross section of subsequent stock returns. The annual return spread between portfolios featuring the highest and lowest levels of asset liquidity is significantly positive. Our proposed measure of asset liquidity outperforms those measures developed by Gopalan et al. (2012) in predicting returns. The asset liquidity anomaly also provides significantly positive alphas when controlling for the asset pricing factors in the Fama and French (1993) three-factor model and the Carhart (1997) four-factor model. Asset liquidity exhibits strong return forecasting power even after controlling for acknowledged cross-sectional determinants of return. The positive relation between asset liquidity and future returns tends to be stronger for firms with greater asset productivity, higher quality cash flow and lower capital investment.

Suggested Citation

  • Ze-To, Samuel Yau Man, 2016. "Asset liquidity and stock returns," Advances in accounting, Elsevier, vol. 35(C), pages 177-196.
    • Handle: RePEc:eee:advacc:v:35:y:2016:i:c:p:177-196
    DOI: 10.1016/j.adiac.2016.08.002
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    References listed on IDEAS

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