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Asset liquidity, business risk, and beta

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  • Nejadmalayeri, Ali

Abstract

Extant literature posits that because of leverage, equity beta estimates from a single factor capital asset pricing model based on an equity-only market index are biased. We show analytically that this leverage bias is intimately related to the firm's asset structure per se, the firm's asset liquidity (i.e., cash holdings) and business risk. This is mainly because riskless cash holdings and risky real assets jointly determine the relevant risk for asset pricing. We empirically confirm that asset liquidity and business risk can marginally explain the leverage bias in the cross-section of stocks returns.

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  • Nejadmalayeri, Ali, 2021. "Asset liquidity, business risk, and beta," Global Finance Journal, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:glofin:v:48:y:2021:i:c:s1044028320301319
    DOI: 10.1016/j.gfj.2020.100560
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    Cited by:

    1. Nejadmalayeri, Ali & Usman, Adam, 2022. "Real asset liquidity, cash holdings, and the cost of corporate debt," Global Finance Journal, Elsevier, vol. 53(C).

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    More about this item

    Keywords

    Multifactor asset pricing; Asset liquidity; Cash holdings; Business risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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