TY - JOUR
T1 - Stock market liquidity and firm value
AU - Fang, Vivian W.
AU - Noe, Thomas H.
AU - Tice, Sheri
PY - 2009/10
Y1 - 2009/10
N2 - 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.
AB - 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.
KW - Blockholder intervention
KW - Feedback mechanism
KW - Firm performance
KW - Managerial compensation
KW - Stock market liquidity
UR - http://www.scopus.com/inward/record.url?scp=69949092669&partnerID=8YFLogxK
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U2 - 10.1016/j.jfineco.2008.08.007
DO - 10.1016/j.jfineco.2008.08.007
M3 - Article
AN - SCOPUS:69949092669
SN - 0304-405X
VL - 94
SP - 150
EP - 169
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 1
ER -