Financial market frictions and learning from the stock price

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See all articles by Dominik Rösch

Dominik Rösch

State University of New York at Buffalo - School of Management; Erasmus University - Rotterdam School of Management

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Mathijs A. Van Dijk

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM)

Date Written: November 12, 2019

Abstract

Liquid stocks may attract short-term traders who could attenuate the informativeness of
stock prices about long-run fundamentals. As a result, managers may be less (more) likely
to rely on the market prices of more (less) liquid stocks when making real investment
decisions. Supporting this conjecture, we show that real investment is more sensitive
to market prices for less liquid stocks. Using decimalization as an exogenous shock
to liquidity, we show that stocks that experienced the greatest increase in liquidity also
experienced the greatest decrease in the investment-to-price sensitivity. Thus, we propose
that, by discouraging short-termism, illiquidity can increase the efficacy of corporate
resource allocation.

Keywords: financial market frictions, illiquidity, corporate investment, learning from the stock price, short-termism

JEL Classification: G14, G31

Suggested Citation

Rösch, Dominik and Subrahmanyam, Avanidhar and Van Dijk, Mathijs A., Financial market frictions and learning from the stock price (November 12, 2019). Available at SSRN: https://ssrn.com/abstract=

Dominik Rösch

State University of New York at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

HOME PAGE: http://dominikroesch.com

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Mathijs A. Van Dijk (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands
+31 10 408 1124 (Phone)
+31 10 408 9017 (Fax)

HOME PAGE: http://mathijsavandijk.com/

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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