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Does the uncertainty of firm-level fundamentals help explain cross-sectional differences in liquidity commonality?

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  • Isshaq, Zangina
  • Faff, Robert

Abstract

Our goal is to better understand the economic sources of commonality in liquidity. To this end, we argue that a firm with low (high) volatility in its “fundamental” profitability will have a higher (lower) liquidity commonality because it is more (less) likely to serve as reference stock in the setting of cross-asset learning about fundamentals. As predicted, we find that commonality in liquidity is negatively related to profitability volatility. This negative relation holds after controlling for correlated trading, size, book-to-market effects, idiosyncratic volatility, stock returns, and managerial income smoothing.

Suggested Citation

  • Isshaq, Zangina & Faff, Robert, 2016. "Does the uncertainty of firm-level fundamentals help explain cross-sectional differences in liquidity commonality?," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 153-161.
    • Handle: RePEc:eee:jbfina:v:68:y:2016:i:c:p:153-161
    DOI: 10.1016/j.jbankfin.2016.02.012
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    5. Abdulrahman Alhassan & Atsuyuki Naka & Abdullah Noman, 2021. "Oil Market Factors as a Source of Commonality in Liquidity in International Equity Markets," JRFM, MDPI, vol. 14(8), pages 1-33, August.

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    More about this item

    Keywords

    Profitability volatility; Commonality in liquidity; Learning;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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