Stock Extreme Illiquidity and the Cost of Capital

59 Pages Posted: 26 Apr 2018

See all articles by Mohamed Belkhir

Mohamed Belkhir

United Arab Emirates University (UAEU)

Mohsen Saad

American University of Sharjah

Anis Samet

American University of Sharjah - School of Business and Management

Date Written: November 2017

Abstract

We examine the relationship between stock extreme illiquidity and the implied cost of capital for firms from 45 countries. We document robust evidence that firms whose stocks have a greater potential for extreme illiquidity realizations suffer from higher cost of capital. A one standard deviation increase in a stock’s liquidity tail index leads to a rise of 30 basis points in the cost of equity. The reported evidence for stock extreme illiquidity is independent of the systematic extreme liquidity risk and extends to alternative cost-percent liquidity proxies. We further find that this relation is stronger in periods of down markets and high volatility and is weaker in environments with better information quality and stronger investor protection.

Keywords: Liquidity; Extreme illiquidity; Cost of capital; Market conditions; Institutions

JEL Classification: G11; G12; G14; G15; F36

Suggested Citation

Belkhir, Mohamed and Saad, Mohsen and Samet, Anis, Stock Extreme Illiquidity and the Cost of Capital (November 2017). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3158887

Mohamed Belkhir

United Arab Emirates University (UAEU) ( email )

College of Business and Economics
P.O.Box 17555
Al Ain, 17555
United Arab Emirates

Mohsen Saad

American University of Sharjah ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

Anis Samet (Contact Author)

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

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