Stock Liquidity and Investment Efficiency: Evidence From Two Quasi-Natural Experiments in China

58 Pages Posted: 18 Nov 2021 Last revised: 28 Mar 2022

See all articles by William M. Cheung

William M. Cheung

Waseda University

Hyun Joong Im

The University of Seoul

Srinivasan Selvam

Peking University - HSBC Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2022

Abstract

Using two quasi-natural experiments in China, we examine the effect of stock liquidity on investment efficiency. We find that enhanced stock liquidity leads to more efficient investment and the effect is much more pronounced for under-investing firms compared to over-investing firms. In addition, we show that enhanced stock liquidity increases institutional ownership, board independence, and price efficiency, especially for under-investing firms. These findings are highly consistent with feedback and incentive theories on the effects of stock liquidity on corporate investment and financing decisions. Our findings highlight externalities linked to the Chinese reforms and further substantiate the real effects of financial markets.

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

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

Suggested Citation

Cheung, William Ming Yan and Im, Hyun Joong and Selvam, Srinivasan, Stock Liquidity and Investment Efficiency: Evidence From Two Quasi-Natural Experiments in China (February 28, 2022). Available at SSRN: https://ssrn.com/abstract=3966116 or http://dx.doi.org/10.2139/ssrn.3966116

William Ming Yan Cheung

Waseda University ( email )

1-6-1 Nishi-Waseda, Shinjuku-ku
1-6-1 Nishi-Waseda, Shinjuku-ku
Tokyo, Tokyo 169-8050
Japan

HOME PAGE: http://https://www.waseda.jp/fcom/wbs/other-en/5049

Hyun Joong Im (Contact Author)

The University of Seoul ( email )

163 Seoulsiripdae-ro
Dongdaemun-gu
Seoul, 02504
Korea, Republic of (South Korea)
+82-2-6490-2268 (Phone)
+82-2-6490-2219 (Fax)

Srinivasan Selvam

Peking University - HSBC Business School ( email )

University Town
Shenzhen, 518055
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
95
Abstract Views
534
rank
324,680
PlumX Metrics