Stock market liquidity and firm value

Fang, Vivian, Noe, Thomas and Tice, Sheri (2009) Stock market liquidity and firm value. Journal of Financial Economics, 94 (1). pp. 150-169.

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.

Item Type: Article
Keywords: Stock market liquidity; Firm performance; Feedback mechanism; Managerial compensation; Blockholder intervention; finance
Subject(s): Finance
Date Deposited: 04 May 2012 08:33
Last Modified: 24 Feb 2017 16:09
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3747

Actions (login required)

Edit View Edit View