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Product Market Power and Stock Market Liquidity

55 Pages Posted: 18 Mar 2009 Last revised: 29 Dec 2010

Jayant R. Kale

Northeastern University

Yee Cheng Loon

Securities and Exchange Commission (SEC)

Date Written: August 27, 2010

Abstract

Theory predicts that since a firm with market power has more stable cash flows because of its ability to set prices in the product market, its stock price is less sensitive to order flow (Peress, 2010), which results in greater stock liquidity. We test this prediction on a large sample of firms and find that stock liquidity increases with market power because market power reduces return volatility. Further, consistent with theoretical predictions, the impact of market power on liquidity is more pronounced when information asymmetry is more severe, that is, for smaller firms and for firms with less analyst coverage. Our findings are robust to different measures of liquidity, market power, volatility, and alternative econometric model specifications.

Keywords: Product market, Market power, Liquidity, Asymmetric information

JEL Classification: D4, D8, G1, L1

Suggested Citation

Kale, Jayant R. and Loon, Yee Cheng, Product Market Power and Stock Market Liquidity (August 27, 2010). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1362159

Jayant Raghunath Kale (Contact Author)

Northeastern University ( email )

Boston, MA 02115
United States

Yee Cheng Loon

Securities and Exchange Commission (SEC) ( email )

100 F Street NE
Washington, DC 20549
United States

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