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Illiquidity and Earnings Predictability


Jon N. Kerr


Baruch College - CUNY, Zicklin School of Business

Gil Sadka


University of Texas at Dallas

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)
Baruch College - CUNY, Zicklin School of Business ( email )
17 Lexington Avenue
New York, NY 10021
United States
646-312-3164 (Phone)
646-312-3161 (Fax)
Gil Sadka
University of Texas at Dallas ( email )
2601 North Floyd Road
Richardson, TX 75083
United States
Ronnie Sadka
Boston College - Carroll School of Management ( email )
140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States
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