Stock Market Liquidity and Firm Value

51 Pages Posted: 21 Oct 2008 Last revised: 13 Dec 2013

See all articles by Vivian W. Fang

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Sheri Tice

Tulane University - A.B. Freeman School of Business

Date Written: August 18, 2008

Abstract

This paper investigates the relation between stock liquidity and firm performance. The study documents that firms with liquid stocks have better performance as measured by the firm market-to-book ratio. This result is robust to the inclusion of industry or firm fixed effects, a control for idiosyncratic risk, a control for endogenous liquidity using two stage least squares, and the use of alternative measures of liquidity. To identify the causal effect of liquidity on firm performance, we study an exogenous shock to liquidity --- the decimalization of stock trading --- and document that the increase in liquidity around decimalization improves firm performance. The causes of liquidity’s beneficial effect are investigated: Liquidity increases the information content of market prices and of performance sensitive managerial compensation. Finally, momentum trading, analyst coverage, investor overreaction, and the effect of liquidity on discount rates or expected returns do not appear to drive the results.

Keywords: Stock Market Liquidity, Firm Performance, Feedback Mechanism, Managerial Compensation, Blockholder Intervention

JEL Classification: G10

Suggested Citation

Fang, Vivian W. and Noe, Thomas H. and Tice, Sheri, Stock Market Liquidity and Firm Value (August 18, 2008). Journal of Financial Economics (JFE), Vol. 94, pp. 150-169, 2009. Available at SSRN: https://ssrn.com/abstract=1287646

Vivian W. Fang

University of Minnesota - Twin Cities - Department of Accounting ( email )

321 19th Avenue South
Room 3-109
Minneapolis, MN 55455
United States

HOME PAGE: http://www.vivianfang.org

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Sheri Tice (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

A.B. Freeman School of Business
7 McAlister Drive
New Orleans, LA 70118
United States
504-865-5469 (Phone)
504-865-6751 (Fax)

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