Managerial Decisions, Asset Liquidity, and Stock Liquidity

43 Pages Posted: 16 Feb 2009

See all articles by Radhakrishnan Gopalan

Radhakrishnan Gopalan

Washington University in St. Louis - John M. Olin Business School

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School

Mikhail Pevzner

University of Baltimore - Merrick School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: February 2009

Abstract

We predict a positive relationship between the liquidity of the firm's assets and the liquidity of its stock. This relationship depends on market expectations regarding the deployment of the firm's liquid assets. Thus our hypothesis links stock liquidity to managerial actions that change the liquidity of the firm's assets, such as investment, financing, and payout. Consistent with our prediction, we find that after controlling for firm fixed effects, a one standard deviation increase in asset liquidity increases stock liquidity by 14.5%. The relation is stronger when the manager is less likely to convert liquid assets into illiquid assets such as for low market to book and low capital expenditure firms, during economic recessions, and when expected payout is high. Apart from linking corporate finance decisions to stock liquidity, the analysis also promotes a new rationale for several empirical regularities such as the commonality in stock liquidity, and the improvement in stock liquidity following equity issuances.

Keywords: Stock Liquidity, Asset Liquidity, Investment, Financing, Payout

Suggested Citation

Gopalan, Radhakrishnan and Kadan, Ohad and Pevzner, Mikhail, Managerial Decisions, Asset Liquidity, and Stock Liquidity (February 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1342706 or http://dx.doi.org/10.2139/ssrn.1342706

Radhakrishnan Gopalan (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Ohad Kadan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Mikhail Pevzner

University of Baltimore - Merrick School of Business ( email )

1420 N. Charles St.
Baltimore, MD 21201-5779
United States

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