Stock Market Liquidity and the Long-Run Stock Performance of Debt Issuers

37 Pages Posted: 16 Jul 2006

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Hong Wan

State University of New York at Oswego

Date Written: July 2006

Abstract

Previous studies document that the stock returns of bond issuing firms significantly underperform matched peers over the three to five years following issuance. We revisit this phenomenon and show that the underperformance is the result of an omitted return factor (a bad model problem). Debt issuers have significantly higher stock market liquidity than size and book-to-market matched counterparts, and differences in liquidity are largest for the worst performing groups of issuers. When we additionally match on liquidity or when we include a liquidity factor in the model for expected returns, the evidence of underperformance disappears.

Keywords: Long run performance, liquidity, debt issues

JEL Classification: G14, G32, G12

Suggested Citation

Butler, Alexander W. and Wan, Hong, Stock Market Liquidity and the Long-Run Stock Performance of Debt Issuers (July 2006). Available at SSRN: https://ssrn.com/abstract=915350 or http://dx.doi.org/10.2139/ssrn.915350

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/

Hong Wan

State University of New York at Oswego ( email )

School of Business
Oswego, NY 13126
United States

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