The Effect of Stock Liquidity on the Firm's Investment and Production

56 Pages Posted: 1 Jun 2018 Last revised: 8 Dec 2019

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Shai Levi

Tel Aviv University

Date Written: November 23, 2019

Abstract

We show that stock market liquidity affects subsequent corporate investment and production. Stock illiquidity, which raises the firm’s cost of capital, lowers investment in capital assets, R&D, and inventory. This effect holds regardless of the firms’ financially constraints. Consequently, illiquidity induces firms to adopt production processes that are less capital intensive. Illiquid firms have higher marginal productivity of capital, greater labor input increase for given increases in assets, and lower operating leverage, thus being less reliant on fixed costs. These effects hold after controlling for endogeneity, employing an exogenous liquidity event – the 2001 decimalization – and the instrumental variable method.

Keywords: liquidity, investment, production

Suggested Citation

Amihud, Yakov and Levi, Shai, The Effect of Stock Liquidity on the Firm's Investment and Production (November 23, 2019). Available at SSRN: https://ssrn.com/abstract=3183091 or http://dx.doi.org/10.2139/ssrn.3183091

Yakov Amihud

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)

Shai Levi (Contact Author)

Tel Aviv University ( email )

Tel Aviv, 69978
Israel

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
414
Abstract Views
1,693
rank
76,898
PlumX Metrics