Stock Liquidity Risk and the Cross‐Sectional Earnings‐Returns Relationship

21 Pages Posted: 10 Nov 2016

See all articles by Zangina Isshaq

Zangina Isshaq

University of Cape Coast

Robert W. Faff

University of Queensland

Date Written: October/November 2016

Abstract

We argue that a higher sensitivity to aggregate market‐wide liquidity shocks (i.e., a higher liquidity risk) implies a tendency for a stock's price to converge to fundamentals. We test this intuition within the framework of the earnings‐returns relationship. We find a positive liquidity risk effect on the relationship between return and expected change in earnings. This effect on the earnings‐returns relationship is distinct from the negative effect observed for stock illiquidity level. Notably, the liquidity risk effect is evident (absent) during periods of neutral/low (high) aggregate market liquidity. We also show that the liquidity risk effect is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book‐to‐market; and (c) are profit making.

Keywords: stock liquidity risk, earnings‐returns relationship

Suggested Citation

Isshaq, Zangina and Faff, Robert W., Stock Liquidity Risk and the Cross‐Sectional Earnings‐Returns Relationship (October/November 2016). Journal of Business Finance & Accounting, Vol. 43, Issue 9-10, pp. 1121-1141, 2016. Available at SSRN: https://ssrn.com/abstract=2867178 or http://dx.doi.org/10.1111/jbfa.12209

Zangina Isshaq (Contact Author)

University of Cape Coast ( email )

PMB, UCC, GHANA
Department of English
Cape Coast, Central Region
Ghana

Robert W. Faff

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
0
Abstract Views
132
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information