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Liquidity and Capital Structure

Marc L. Lipson

University of Virginia - Darden School of Business

Sandra Mortal

University of Memphis

March 3, 2009

Journal of Financial Markets, Forthcoming
Darden Business School Working Paper

We examine the relation between equity market liquidity and capital structure. We find that firms with more liquid equity have lower leverage and prefer equity financing when raising capital. For example, after sorting firms into size quintiles and then into liquidity quintiles, the average debt-to-asset ratio of the most liquid quintiles is about 38% while the average for the least liquid quintiles is 55%. Similar results are observed in panel analyses with clustered errors and using instrumental variables. Our results are consistent with equity market liquidity lowering the cost of equity and, therefore, inducing a greater reliance on equity financing.

Number of Pages in PDF File: 49

Keywords: Capital structure, Liquidity, Market microstructure

JEL Classification: G12, G32

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Date posted: March 2, 2006 ; Last revised: July 14, 2013

Suggested Citation

Lipson, Marc L. and Mortal, Sandra, Liquidity and Capital Structure (March 3, 2009). Journal of Financial Markets, Forthcoming; Darden Business School Working Paper. Available at SSRN: https://ssrn.com/abstract=887413 or http://dx.doi.org/10.2139/ssrn.887413

Contact Information

Marc Lars Lipson (Contact Author)
University of Virginia - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)
HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

Sandra Mortal
University of Memphis ( email )
Memphis, TN 38152
United States
(901) 678-4327 (Phone)
(901) 678-0839 (Fax)
HOME PAGE: http://https://umdrive.memphis.edu/scmortal/public/
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