Stock Liquidity and the Under-investment Problem: A Quasi-natural Experiment in China

Western Economic Association International (WEAI), 2019; Asian Meeting of Econometric Society (AMES), 2019; PKU–NUS Annual Conference, 2019; SFM 2018; AFBC 2018; CAFM 2018

59 Pages Posted: 7 Mar 2019 Last revised: 27 Jul 2020

See all articles by William M. Cheung

William M. Cheung

University of Macau

Robert W. Faff

Bond University; University of Queensland

Hyun Joong Im

The University of Seoul; Peking University - HSBC Business School

Srinivasan Selvam

Peking University - HSBC Business School

Date Written: July 25, 2020

Abstract

Using the split-share structure reform in China as a quasi-natural experiment, we examine the effect of stock liquidity on investment efficiency. Consistent with feedback and incentive theories, investment efficiency increases after the reform but only for under-investing firms. Higher stock liquidity increases institutional ownership, board independence, and price efficiency, especially for under-investing firms; thus, allowing managers to invest more optimally. Our analysis is robust to a battery of considerations, including multiple specifications and several natural experiments. Our findings highlight externalities linked to the Chinese reform and further substantiate the real effects of financial markets.

Keywords: Stock liquidity, Investment efficiency, Underinvestment, Institutional ownership, Information efficiency, Corporate governance

JEL Classification: G12, G14, G15, G31, D83, G34

Suggested Citation

Cheung, William Ming Yan and Faff, Robert W. and Im, Hyun Joong and Selvam, Srinivasan, Stock Liquidity and the Under-investment Problem: A Quasi-natural Experiment in China (July 25, 2020). Western Economic Association International (WEAI), 2019; Asian Meeting of Econometric Society (AMES), 2019; PKU–NUS Annual Conference, 2019; SFM 2018; AFBC 2018; CAFM 2018, Available at SSRN: https://ssrn.com/abstract=3335116 or http://dx.doi.org/10.2139/ssrn.3335116

William Ming Yan Cheung

University of Macau ( email )

Macau

Robert W. Faff

Bond University ( email )

Gold Coast, QLD 4229
Australia

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Hyun Joong Im (Contact Author)

The University of Seoul ( email )

Korea, Republic of (South Korea)
+82-2-6490-2268 (Phone)
+82-2-6490-2219 (Fax)

Peking University - HSBC Business School ( email )

China

Srinivasan Selvam

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

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