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Liquidity, the Value of the Firm, and Corporate Finance

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  • Yakov Amihud
  • Haim Mendelson
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    Abstract

    The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected after-tax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that differences-and changes-in liquidity can have major effects on the pricing of corporate stocks and bonds or, equivalently, on investors' required returns for holding them. Copyright (c) 2008 Morgan Stanley.

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    Bibliographic Info

    Article provided by Morgan Stanley in its journal Journal of Applied Corporate Finance.

    Volume (Year): 20 (2008)
    Issue (Month): 2 ()
    Pages: 32-45

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    Handle: RePEc:bla:jacrfn:v:20:y:2008:i:2:p:32-45

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    Cited by:
    1. Frestad, Dennis, 2012. "Liquidity and dirty hedging in the Nordic electricity market," Energy Economics, Elsevier, vol. 34(5), pages 1341-1355.
    2. Autore, Don M. & Billingsley, Randall S. & Kovacs, Tunde, 2011. "The 2008 short sale ban: Liquidity, dispersion of opinion, and the cross-section of returns of US financial stocks," Journal of Banking & Finance, Elsevier, vol. 35(9), pages 2252-2266, September.
    3. Poon, Ser-Huang & Rockinger, Michael & Stathopoulos, Konstantinos, 2013. "Market liquidity and institutional trading during the 2007–8 financial crisis," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 86-97.
    4. Fecht, Falko & Füss, Roland & Rindler, Philipp B., . "Corporate Transparency and Bond Liquidity," Working Papers on Finance 1404, University of St. Gallen, School of Finance.

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