IDEAS home Printed from https://ideas.repec.org/a/eee/advacc/v35y2016icp177-196.html
   My bibliography  Save this article

Asset liquidity and stock returns

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0882611015301590
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.adiac.2016.08.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Williamson, Oliver E, 1988. " Corporate Finance and Corporate Governance," Journal of Finance, American Finance Association, vol. 43(3), pages 567-591, July.
    2. Shleifer, Andrei & Vishny, Robert W, 1992. "Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-1366, September.
    3. Rajiv D. Banker & Rong Huang & Ramachandran Natarajan, 2009. "Incentive Contracting and Value Relevance of Earnings and Cash Flows," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 647-678, June.
    4. Karen Benson & Robert Faff & Tom Smith & Steven Cahan, 2014. "Fifty years of finance research in the Asia Pacific Basin," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(2), pages 335-363, June.
    5. Gopalan, Radhakrishnan & Kadan, Ohad & Pevzner, Mikhail, 2012. "Asset Liquidity and Stock Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(2), pages 333-364, April.
    6. Charitou, Andreas & Vafeas, Nikos & Zachariades, Charis, 2005. "Irrational investor response to stock splits in an emerging market," The International Journal of Accounting, Elsevier, vol. 40(2), pages 133-149.
    7. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    8. Palazzo, Berardino, 2012. "Cash holdings, risk, and expected returns," Journal of Financial Economics, Elsevier, vol. 104(1), pages 162-185.
    9. Mikhail Simutin, 2010. "Excess Cash and Stock Returns," Financial Management, Financial Management Association International, vol. 39(3), pages 1197-1222, September.
    10. Daniel Chai & Robert Faff & Philip Gharghori, 2013. "Liquidity in asset pricing: New Australian evidence using low-frequency data," Australian Journal of Management, Australian School of Business, vol. 38(2), pages 375-400, August.
    11. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    12. Michael Aitken & Carole Comerton‐Forde, 2005. "Do reductions in tick sizes influence liquidity?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(2), pages 171-184, July.
    13. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    14. Flor, Christian Riis & Hirth, Stefan, 2013. "Asset liquidity, corporate investment, and endogenous financing costs," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 474-489.
    15. Hong, Xin, 2014. "The dynamics of hedge fund share restrictions," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 82-99.
    16. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    17. Charlie Charoenwong & Beng Soon Chong & Yung Chiang Yang, 2014. "Asset Liquidity and Stock Liquidity: International Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(3-4), pages 435-468, April.
    18. Sibilkov, Valeriy, 2009. "Asset Liquidity and Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(5), pages 1173-1196, October.
    19. Michael Aitken & Carole Comerton‐Forde & Alex Frino, 2005. "Closing call auctions and liquidity," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 45(4), pages 501-518, December.
    20. Kiril Alampieski & Andrew Lepone, 2009. "Impact of a tick size reduction on liquidity: evidence from the Sydney Futures Exchange," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 49(1), pages 1-20, March.
    21. Joan Winn, 1997. "Asset Productivity Turnaround: the Growth/Efficiency Challenge," Journal of Management Studies, Wiley Blackwell, vol. 34(4), pages 585-600, July.
    22. Ortiz-Molina, Hernán & Phillips, Gordon M., 2014. "Real Asset Illiquidity and the Cost of Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(1), pages 1-32, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benson, Karen & Faff, Robert & Smith, Tom, 2015. "Injecting liquidity into liquidity research," Pacific-Basin Finance Journal, Elsevier, vol. 35(PB), pages 533-540.
    2. Usman, Adam, 2022. "Cash holdings and real asset liquidity," International Review of Financial Analysis, Elsevier, vol. 83(C).
    3. Kewei Hou & Chen Xue & Lu Zhang, 2017. "Replicating Anomalies," NBER Working Papers 23394, National Bureau of Economic Research, Inc.
    4. Huang, Winifred & Mazouz, Khelifa, 2018. "Excess cash, trading continuity, and liquidity risk," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 275-291.
    5. Pham, Ly Thi Minh & Vo, Lai Van & Le, Huong Thi Thu & Le, Danh Vinh, 2018. "Asset liquidity and firm innovation," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 225-234.
    6. Guanhao Feng & Stefano Giglio & Dacheng Xiu, 2020. "Taming the Factor Zoo: A Test of New Factors," Journal of Finance, American Finance Association, vol. 75(3), pages 1327-1370, June.
    7. Huang, Guan-Ying & Huang, Henry Hongren & Lee, Chun I, 2020. "Taming the dark side of asset liquidity: The role of short-term debt," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 539-562.
    8. Hoang, Khoa & Cannavan, Damien & Gaunt, Clive & Huang, Ronghong, 2019. "Is that factor just lucky? Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    9. David H. Downs & Bing Zhu, 2022. "Property market liquidity and REIT liquidity," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(6), pages 1462-1491, November.
    10. Chen, Jiun-Lin & Jia, Z. Tingting & Sun, Ping-Wen, 2016. "Real option component of cash holdings, business cycle, and stock returns," International Review of Financial Analysis, Elsevier, vol. 45(C), pages 97-106.
    11. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, September.
    12. Nartea, Gilbert V. & Bai, Hengyu & Wu, Ji, 2020. "Investor sentiment and the economic policy uncertainty premium," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    13. Jiaju Miao & Pawel Polak, 2023. "Online Ensemble of Models for Optimal Predictive Performance with Applications to Sector Rotation Strategy," Papers 2304.09947, arXiv.org.
    14. Miguel Antón & Christopher Polk, 2014. "Connected Stocks," Journal of Finance, American Finance Association, vol. 69(3), pages 1099-1127, June.
    15. Nejadmalayeri, Ali & Usman, Adam, 2022. "Real asset liquidity, cash holdings, and the cost of corporate debt," Global Finance Journal, Elsevier, vol. 53(C).
    16. Rong, Yuen & Tian, Cunzhi & Li, Lifang & Zheng, Xinwei, 2020. "Does asset redeployability affect corporate investment and equity value?," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 479-492.
    17. Tobek, Ondrej & Hronec, Martin, 2021. "Does it pay to follow anomalies research? Machine learning approach with international evidence," Journal of Financial Markets, Elsevier, vol. 56(C).
    18. Chuan ‘Chewie’ Ang, Tze & Lam, F.Y. Eric C. & Ma, Tai & Wang, Shujing & Wei, K.C. John, 2019. "What is the real relationship between cash holdings and stock returns?," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 513-528.
    19. Svetlana Bryzgalova & Jiantao Huang & Christian Julliard, 2023. "Bayesian Solutions for the Factor Zoo: We Just Ran Two Quadrillion Models," Journal of Finance, American Finance Association, vol. 78(1), pages 487-557, February.
    20. Woon Sau Leung & Nicholas Taylor, 2013. "Testing for contagion: the impact of US structured markets on international financial markets," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 11, pages 256-284, Edward Elgar Publishing.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:advacc:v:35:y:2016:i:c:p:177-196. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/advances-in-accounting/ .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.