The Effect of Stock Liquidity on Corporate Risk-Taking

41 Pages Posted: 29 Aug 2018

See all articles by Charles Hsu

Charles Hsu

Hong Kong University of Science & Technology

Zhiming Ma

Peking University

Liansheng Wu

Peking University - Guanghua School of Management

Kaitang Zhou

School of Economics and Management, Wuhan University

Date Written: July 20, 2018

Abstract

This study examines the effect of stock liquidity on corporate risk-taking behavior. We find that stock liquidity has a positive and significant effect on corporate risk-taking. We find consistent results when we use the Split Share Structure Reform (SSSR) in China as an exogenous shock to stock liquidity. We also investigate the channels through which stock liquidity affects risk-taking and find that increases in stock liquidity lower the cost of capital and increase the pay-for-performance sensitivity of managers. Finally, we conduct cross-sectional tests to rule out privatization as an alternative explanation for our results. Our study sheds light on the real effects of stock liquidity and contributes to the understanding of capital market development.

Keywords: Stock Liquidity, Risk-Taking, Cost of Capital, Pay-for-Performance Sensitivity, Split Share Structure Reform

JEL Classification: G15, G32, G38, M41

Suggested Citation

Hsu, Charles and Ma, Zhiming and Wu, Liansheng and Zhou, Kaitang, The Effect of Stock Liquidity on Corporate Risk-Taking (July 20, 2018). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3235180

Charles Hsu (Contact Author)

Hong Kong University of Science & Technology ( email )

Hong Kong
Hong Kong
852-2358-7568 (Phone)
852-2358-1693 (Fax)

Zhiming Ma

Peking University ( email )

Department of Accounting
Guanghua School of Management
Beijing, 100871
China

Liansheng Wu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Kaitang Zhou

School of Economics and Management, Wuhan University ( email )

Wuhan, 430072
China

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