Liquidity and Capital Structure
Marc L. Lipson
University of Virginia - Darden School of Business
University of Memphis
March 3, 2009
Journal of Financial Markets, Forthcoming
Darden Business School Working Paper
We examine the relation between equity market liquidity and capital structure. We find that firms with more liquid equity have lower leverage and prefer equity financing when raising capital. For example, after sorting firms into size quintiles and then into liquidity quintiles, the average debt-to-asset ratio of the most liquid quintiles is about 38% while the average for the least liquid quintiles is 55%. Similar results are observed in panel analyses with clustered errors and using instrumental variables. Our results are consistent with equity market liquidity lowering the cost of equity and, therefore, inducing a greater reliance on equity financing.
Number of Pages in PDF File: 49
Keywords: Capital structure, Liquidity, Market microstructure
JEL Classification: G12, G32
Date posted: March 2, 2006 ; Last revised: July 14, 2013
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