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Stock Market Liquidity and the Long-Run Stock Performance of Debt Issuers

Alexander W. Butler
Rice University - Jesse H. Jones Graduate School of Management

Hong Wan
State University of New York at Oswego; State University of New York at Oswego

July 2006

Abstract:
Previous studies document that the stock returns of bond issuing firms significantly underperform matched peers over the three to five years following issuance. We revisit this phenomenon and show that the underperformance is the result of an omitted return factor (a bad model problem). Debt issuers have significantly higher stock market liquidity than size and book-to-market matched counterparts, and differences in liquidity are largest for the worst performing groups of issuers. When we additionally match on liquidity or when we include a liquidity factor in the model for expected returns, the evidence of underperformance disappears.

Keywords: Long run performance, liquidity, debt issues

JEL Classifications: G14, G32, G12

Working Paper Series

Date posted: July 16, 2006 ; Last revised: July 16, 2006

Suggested Citation

Butler, Alexander W. and Wan, Hong, Stock Market Liquidity and the Long-Run Stock Performance of Debt Issuers (July 2006). Available at SSRN: http://ssrn.com/abstract=915350

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Contact Information

Alexander W. Butler (Contact Author) Rice University - Jesse H. Jones Graduate School of Management ( email ) MS 531 Houston, TX 77005 United States 713-348-6341 (Phone) HOME PAGE: http://www.owlnet.rice.edu/~awbutler/
Hong Wan State University of New York at Oswego ( email ) School of Business Oswego, NY 13126 United States
State University of New York at Oswego ( email ) 211 Rich Hall SUNY at Oswego Oswego, NY 13126 United States