Asset Liquidity, and Stock Liquidity

51 Pages Posted: 22 Mar 2009 Last revised: 22 Dec 2010

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: January 1, 2010

Abstract

We study the balance sheet of liquidity: the relation between the liquidity of the firm's assets and the liquidity of financial claims on the assets, thereby linking corporate finance decisions to stock liquidity. Our model highlights an ambiguous relationship. While greater asset liquidity reduces uncertainty regarding valuation of assets-in-place, it increases future investments and the associated uncertainty. The model shows that asset liquidity improves stock liquidity more for firms which are less likely to reinvest their liquid assets, i.e., firms with less growth opportunities and financially constrained firms. Empirically, we find a positive and economically large relation between asset liquidity and stock liquidity. Consistent with our model, the relation is stronger for firms with low growth opportunities and for financially constrained firms. The relation between asset liquidity and stock liquidity that we uncover sheds new light on the importance of financial frictions for firm investment policy, the tendency of managers to overinvest, and on the value of holding liquid assets.

Keywords: Stock Liquidity, Asset Liquidity, Managerial Decisions

JEL Classification: G12, G31, G24, G32, G34, M41

Suggested Citation

Gopalan, Radhakrishnan and Kadan, Ohad and Pevzner, Mikhail, Asset Liquidity, and Stock Liquidity (January 1, 2010). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1362074

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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