Advanced Search
MyIDEAS: Login to save this article or follow this journal

Stock market liquidity and firm value

Contents:

Author Info

  • Fang, Vivian W.
  • Noe, Thomas H.
  • Tice, Sheri

Abstract

This paper investigates the relation between stock liquidity and firm performance. The study shows that firms with liquid stocks have better performance as measured by the firm market-to-book ratio. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two-stage least squares, and the use of alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity--the decimalization of stock trading--and show that the increase in liquidity around decimalization improves firm performance. The causes of liquidity's beneficial effect are investigated: Liquidity increases the information content of market prices and of performance-sensitive managerial compensation. Finally, momentum trading, analyst coverage, investor overreaction, and the effect of liquidity on discount rates or expected returns do not appear to drive the results.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6VBX-4WK4SPN-1/2/e586c229dcbeeb3089ed36ae3306ab16
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 94 (2009)
Issue (Month): 1 (October)
Pages: 150-169

as in new window
Handle: RePEc:eee:jfinec:v:94:y:2009:i:1:p:150-169

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/505576

Related research

Keywords: Stock market liquidity Firm performance Feedback mechanism Managerial compensation Blockholder intervention;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2008. "Liquidity and market efficiency," Journal of Financial Economics, Elsevier, vol. 87(2), pages 249-268, February.
  2. Malcolm Baker & Jeremy C. Stein, 2002. "Market Liquidity as a Sentiment Indicator," Harvard Institute of Economic Research Working Papers 1977, Harvard - Institute of Economic Research.
  3. Luboš Pástor & Robert F. Stambaugh, . "Liquidity Risk and Expected Stock Returns," CRSP working papers 531, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Gutierrez, Roberto Jr. & Prinsky, Christo A., 2007. "Momentum, reversal, and the trading behaviors of institutions," Journal of Financial Markets, Elsevier, vol. 10(1), pages 48-75, February.
  5. Dlugosz, Jennifer & Fahlenbrach, Rudiger & Gompers, Paul & Metrick, Andrew, 2006. "Large blocks of stock: Prevalence, size, and measurement," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 594-618, June.
  6. Bengt Holmström, 2001. "LAPM: A Liquidity-Based Asset Pricing Model," Journal of Finance, American Finance Association, vol. 56(5), pages 1837-1867, October.
  7. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
  8. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Lesmond, David A & Ogden, Joseph P & Trzcinka, Charles A, 1999. "A New Estimate of Transaction Costs," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1113-41.
  10. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
  11. Core, John & Guay, Wayne, 1999. "The use of equity grants to manage optimal equity incentive levels," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 151-184, December.
  12. Bessembinder, Hendrik, 2003. "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(04), pages 747-777, December.
  13. Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
  14. Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
  15. Joel Hasbrouck, 2009. "Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data," Journal of Finance, American Finance Association, vol. 64(3), pages 1445-1477, 06.
  16. Ernst Maug, 1998. "Large Shareholders as Monitors: Is There a Trade-Off between Liquidity and Control?," Journal of Finance, American Finance Association, vol. 53(1), pages 65-98, 02.
  17. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
  18. Lesmond, David A., 2005. "Liquidity of emerging markets," Journal of Financial Economics, Elsevier, vol. 77(2), pages 411-452, August.
  19. Khanna, Naveen & Sonti, Ramana, 2004. "Value creating stock manipulation: feedback effect of stock prices on firm value," Journal of Financial Markets, Elsevier, vol. 7(3), pages 237-270, June.
  20. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  21. Avanidhar Subrahmanyam, 2001. "Feedback from Stock Prices to Cash Flows," Journal of Finance, American Finance Association, vol. 56(6), pages 2389-2413, December.
  22. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
  23. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, vol. 51(3), pages 371-406, March.
  24. Stoll, Hans R. & Whaley, Robert E., 1983. "Transaction costs and the small firm effect," Journal of Financial Economics, Elsevier, vol. 12(1), pages 57-79, June.
  25. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, 02.
  26. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 133-164.
  27. Goyenko, Ruslan Y. & Holden, Craig W. & Trzcinka, Charles A., 2009. "Do liquidity measures measure liquidity?," Journal of Financial Economics, Elsevier, vol. 92(2), pages 153-181, May.
  28. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
  29. Yermack, David, 1995. "Do corporations award CEO stock options effectively?," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 237-269.
  30. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
  31. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
  32. Berkman, Henk & Dimitrov, Valentin & Jain, Prem C. & Koch, Paul D. & Tice, Sheri, 2009. "Sell on the news: Differences of opinion, short-sales constraints, and returns around earnings announcements," Journal of Financial Economics, Elsevier, vol. 92(3), pages 376-399, June.
  33. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04.
  34. Bhide, Amar, 1993. "The hidden costs of stock market liquidity," Journal of Financial Economics, Elsevier, vol. 34(1), pages 31-51, August.
  35. Attari, Mukarram & Banerjee, Suman & Noe, Thomas H., 2006. "Crushed by a rational stampede: Strategic share dumping and shareholder insurrections," Journal of Financial Economics, Elsevier, vol. 79(1), pages 181-222, January.
  36. Meir Statman & Steven Thorley & Keith Vorkink, 2006. "Investor Overconfidence and Trading Volume," Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1531-1565.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Acharya, Viral V. & Amihud, Yakov & Bharath, Sreedhar T., 2013. "Liquidity risk of corporate bond returns: conditional approach," Journal of Financial Economics, Elsevier, vol. 110(2), pages 358-386.
  2. Stulz, Rene M. & Vagias, Dimitrios & Van Dijk, Mathijs A., 2013. "Do Firms Issue More Equity When Markets Are More Liquid?," Working Paper Series 2013-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  3. Nadia Belkhir Boujelbene & Abdelfatteh Bouri & Jean-Luc Prigent, 2011. "Ownership structure and stock market liquidity: evidence from Tunisia," International Journal of Managerial and Financial Accounting, Inderscience Enterprises Ltd, vol. 3(1), pages 91-109.
  4. Kale, Jayant R. & Loon, Yee Cheng, 2011. "Product market power and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 14(2), pages 376-410, May.
  5. Alex Edmans & Vivian W. Fang & Emanuel Zur, 2013. "The Effect of Liquidity on Governance," Review of Financial Studies, Society for Financial Studies, vol. 26(6), pages 1443-1482.
  6. Nadia Belkhir Boujelbene & Abdelfatteh Bouri & Jean-Luc Prigent, 2014. "Corporate Governance and Market Microstructure: Evidence on Institutional Investors in the Tunisian Stock Exchange," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(2), pages 58-71, April.
  7. Liang, Samuel Xin & Wei, John K.C., 2012. "Liquidity risk and stock returns around the world," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3274-3288.
  8. Chung, Kee H. & Zhang, Hao, 2014. "A simple approximation of intraday spreads using daily data," Journal of Financial Markets, Elsevier, vol. 17(C), pages 94-120.
  9. Bitsch, Florian, 2012. "Do investors value cash flow stability of listed infrastructure funds?," CEFS Working Paper Series 2012-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
  10. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
  11. Li, Wei-Xuan & Chen, Clara Chia-Sheng & French, Joseph J., 2012. "The relationship between liquidity, corporate governance, and firm valuation: Evidence from Russia," Emerging Markets Review, Elsevier, vol. 13(4), pages 465-477.
  12. Back, Kerry E. & Li, Tao & Ljungqvist, Alexander P., 2013. "Liquidity and Governance," CEPR Discussion Papers 9739, C.E.P.R. Discussion Papers.
  13. Bakke, Tor-Erik & Jens, Candace E. & Whited, Toni M., 2012. "The real effects of delisting: Evidence from a regression discontinuity design," Finance Research Letters, Elsevier, vol. 9(4), pages 183-193.
  14. Vo, Xuan Vinh & Batten, Jonathan, 2010. "An Empirical Investigation of Liquidity and Stock Returns Relationship in Vietnam Stock Markets during Financial Crisis," MPRA Paper 29862, University Library of Munich, Germany, revised 10 Jan 2011.
  15. Mohammad Reza Dalvi & Ebrahim Baghi, 2014. "Evaluate the Relationship between Company Performance and Stock Market Liquidity," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 136-144, January.
  16. Foucault, Thierry & Fresard, Laurent, 2014. "Learning from peers' stock prices and corporate investment," Journal of Financial Economics, Elsevier, vol. 111(3), pages 554-577.
  17. repec:hur:ijaraf:v:4:y:2014:i:2:p:62-75 is not listed on IDEAS

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:94:y:2009:i:1:p:150-169. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.