Open AccessStock Market Liquidity: Financially Constrained Firms and Share Repurchase
Author(s) -
Hazel Thu-Hien Nguyen
Publication year - 2017
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v6n4p130
Subject(s) - market liquidity , business , monetary economics , stock (firearms) , equity (law) , stock dilution , finance , market maker , financial system , stock market , economics , mechanical engineering , paleontology , horse , political science , law , engineering , biology
Stock illiquidity raises the cost of share ownership to outside investors and increases firms’ cost of capital. This study substantiates that shares of financially constrained firms are significantly more illiquid than shares of similar but financially unconstrained firms. Acting as buyers of last resort for their own shares, share repurchases by financially constrained firms enhance stock liquidity, which alleviates the cost of external financing and underinvestment. Increased stock liquidity improves information efficiency, inducing higher value-added from incremental capital investments. Further, higher stock liquidity lowers stock volatility and allows financially constrained firms to issue equity.