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Illiquidity and Earnings Predictability


Jon N. Kerr


Columbia University - Columbia Business School

Gil Sadka


Columbia Business School - Accounting, Business Law & Taxation

Ronnie Sadka


Boston College - Carroll School of Management

February 28, 2013

Columbia Business School Research Paper No. 11-1

Abstract:     
This paper studies whether illiquidity affects the predictability of fundamental valuation variables. Firm-level, cross-sectional analyses show that returns of illiquid stocks contain less information about their firm's future earnings growth compared to those of more liquid stocks. A natural experiment utilizing an exogenous variation in liquidity amid the reduction of tick size on the NYSE indicates that an improvement in liquidity causes an increase in earnings predictability. At the aggregate level, stock returns contain less information about future growth in aggregate earnings, GNP, and industrial production during illiquid periods. The results highlight the importance of liquidity for forecasting fundamentals and stock-price efficiency.

Number of Pages in PDF File: 45

Keywords: stock prices, aggregate earnings, illiquidity, expected returns, expected earnings

JEL Classification: E32, G12, G14, M41

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Date posted: March 4, 2011 ; Last revised: March 18, 2013

Suggested Citation

Kerr, Jon N. and Sadka, Gil and Sadka, Ronnie, Illiquidity and Earnings Predictability (February 28, 2013). Columbia Business School Research Paper No. 11-1. Available at SSRN: http://ssrn.com/abstract=1776082 or http://dx.doi.org/10.2139/ssrn.1776082

Contact Information

Jon N. Kerr (Contact Author)
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
206-963-5146 (Phone)
212-316-9219 (Fax)
Gil Sadka
Columbia Business School - Accounting, Business Law & Taxation ( email )
3022 Broadway
613 Uris Hall
New York, NY 10027
United States
212-854-5391 (Phone)

Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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