Liquidity Risk and Cross-Sectional Earnings-Returns Relation

38 Pages Posted: 16 Aug 2012

See all articles by Zangina Isshaq

Zangina Isshaq

University of Queensland

Robert W. Faff

University of Queensland

Date Written: August 16, 2012

Abstract

Employing a broad sample of US firms over the period 1962 to 2009, we provide evidence of a liquidity risk impact on the fundamental earnings-returns relation. Specifically, we document that current liquidity risk has a positive moderating effect on the relation between current returns and next period change in earnings. Notably, this effect is distinct from (and after controlling for) the negative effect observed for illiquidity level (Kerr, Sadka and Sadka, 2012). We further show that the liquidity risk effect on the earnings-returns relation is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book-to-market; and (c) are profitable.

Keywords: Earnings-returns relation, liquidity risk, moderating effects

JEL Classification: E32, G12, G14, M41

Suggested Citation

Isshaq, Zangina and Faff, Robert W., Liquidity Risk and Cross-Sectional Earnings-Returns Relation (August 16, 2012). 25th Australasian Finance and Banking Conference 2012. Available at SSRN: https://ssrn.com/abstract=2130219 or http://dx.doi.org/10.2139/ssrn.2130219

Zangina Isshaq (Contact Author)

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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