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Stock market liquidity and firm value

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

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.

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

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

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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

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