Stock Market Liquidity and the Cost of Raising Capital
37 Pages Posted: 16 Dec 2002
Date Written: November 25, 2002
This paper shows that stock market liquidity is an important determinant of the cost of raising external capital. Using 2,387 seasoned equity offerings (SEOs) from 1993-2000, we find that, after controlling for other factors, investment banks charge lower fees to firms with more liquid stocks. We also find that the time to complete an SEO declines with the level of market liquidity. These results imply that stock market liquidity may affect the value of a firm through its effect on flotation costs.
Keywords: Liquidity, Cost of capital, investment banking
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