Premium
Stock Liquidity and Investment Opportunities: Evidence from Index Additions
Author(s) -
BeckerBlease John R.,
Paul Donna L.
Publication year - 2006
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2006.tb00146.x
Subject(s) - market liquidity , liquidity crisis , accounting liquidity , liquidity premium , monetary economics , liquidity risk , stock (firearms) , equity (law) , economics , business , financial economics , financial system , mechanical engineering , law , political science , engineering
We examine the relation between stock liquidity and investment opportunities in a sample of firms experiencing an exogenous liquidity shock. We find a positive relation between changes in capital expenditures and changes in stock liquidity, indicating that stock liquidity influences corporate investment decisions. This relation is robust to alternative measures of growth opportunities, and is consistent with a liquidity premium in equity returns. That is, an increase in liquidity effectively expands the set of positive NPV projects because it reduces the cost of capital. The results suggest that liquidity‐enhancing events benefit shareholders by increasing the pool of viable growth opportunities.