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Stock liquidity and price‑to‑book discounts: non‑linear evidence from European‑listed firms

Author

Listed:
  • Barros, Victor
  • Gonçalves, Tiago Cruz

Abstract

We test whether liquidity alters valuation asymmetrically across European equities in the period 2001 to 2023. Our findings reveal a convex pattern: a one‑standard‑deviation rise in illiquidity lowers the price‑to‑book ratio by 3 % in the bottom decile but becomes immaterial above the 90th percentile. Specifically, for firms with lower price/book ratios, higher trading volume acts as a mechanism that depresses even further stock pricing, suggesting a negative investor sentiment. Results imply that comparable‑multiple models, liquidity‑based regulation and distressed‑equity screens should all be conditioned on market depth.

Suggested Citation

  • Barros, Victor & Gonçalves, Tiago Cruz, 2025. "Stock liquidity and price‑to‑book discounts: non‑linear evidence from European‑listed firms," Finance Research Letters, Elsevier, vol. 86(PE).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pe:s1544612325020045
    DOI: 10.1016/j.frl.2025.108750
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    References listed on IDEAS

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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