Liquidity and Capital Structure

49 Pages Posted: 2 Mar 2006 Last revised: 14 Jul 2013

Marc L. Lipson

University of Virginia - Darden School of Business

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

Date Written: March 3, 2009

Abstract

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.

Keywords: Capital structure, Liquidity, Market microstructure

JEL Classification: G12, G32

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

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 Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Paper statistics

Downloads
1,961
Rank
5,635
Abstract Views
6,022