Does Stock Market Liquidity Matter? Evidence from Seasoned Equity Offerings

37 Pages Posted: 29 Nov 2003

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business

James Weston

Rice University - Jesse H. Jones Graduate School of Business

Date Written: March 7, 2003

Abstract

This paper presents empirical evidence that stock market liquidity is an important determinant of the cost of raising external capital. Because the role of an investment banking syndicate in a public security offering is analogous to that of a block trader, investment banks should charge lower fees to firms with more liquid securities. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid quintile versus the least liquid quintile, controlling for other factors, is approximately 107 basis points, which represents about 22.3 percent of the average investment banking fee in our sample. Our findings suggest that firms have an incentive to promote the market liquidity of their equity.

Suggested Citation

Butler, Alexander W. and Grullon, Gustavo and Weston, James Peter, Does Stock Market Liquidity Matter? Evidence from Seasoned Equity Offerings (March 7, 2003). AFA 2004 San Diego Meetings. Available at SSRN: https://ssrn.com/abstract=471721 or http://dx.doi.org/10.2139/ssrn.471721

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Gustavo Grullon

Rice University - Jesse H. Jones Graduate School of Business ( email )

P.O. Box 2932
Houston, TX 77252-2932
United States
(713) 348-6138 (Phone)
(713) 348-6331 (Fax)

HOME PAGE: http://www.ruf.rice.edu/~grullon/

James Peter Weston

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

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