The Effect of Information Quality on Liquidity Risk

Abstract:     
I investigate whether information quality affects the cost of equity capital through liquidity risk. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity; recent asset pricing literature has emphasized the importance of this systematic risk. I find that higher information quality is associated with lower liquidity risk and that the reduction in cost of capital due to this association is economically significant. I also find that the negative association between information quality and liquidity risk is stronger in times of large shocks to market liquidity.

Keywords: Information quality, Earnings quality, Liquidity Risk, Cost of Capital, Disclosure

JEL Classification: G01, G11, G12, G14, M41

Accepted Paper Series