IDEAS home Printed from https://ideas.repec.org/a/eee/revfin/v33y2017icp1-11.html
   My bibliography  Save this article

Corporate investment and stock liquidity: Evidence on the price impact of trade

Author

Listed:
  • Kang, Moonsoo
  • Wang, Wei
  • Eom, Chanyoung

Abstract

We document that corporate investment contributes to stock liquidity. This study demonstrates a positive relationship between abnormal corporate investment and stock liquidity in the cross-section. Moreover, stock liquidity improves more apparently for firms with financial constraints. Our robustness check confirms that the existing regularities cannot explain the current finding. This analysis suggests that corporate investment decreases the risk of a firm and that a change in the risk affects the behavior of a market maker, leading to an increase in stock liquidity.

Suggested Citation

  • Kang, Moonsoo & Wang, Wei & Eom, Chanyoung, 2017. "Corporate investment and stock liquidity: Evidence on the price impact of trade," Review of Financial Economics, Elsevier, vol. 33(C), pages 1-11.
    • Handle: RePEc:eee:revfin:v:33:y:2017:i:c:p:1-11
    DOI: 10.1016/j.rfe.2017.02.001
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1058330015300252
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.rfe.2017.02.001?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 969-1005.
    3. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    4. François Derrien & Ambrus Kecskés, 2013. "The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage," Post-Print hal-00852356, HAL.
    5. Stefan Nagel, 2012. "Evaporating Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2005-2039.
    6. repec:bla:jfinan:v:43:y:1988:i:3:p:617-37 is not listed on IDEAS
    7. repec:bla:jfinan:v:59:y:2004:i:1:p:1-30 is not listed on IDEAS
    8. Laura Xiaolei Liu & Toni M. Whited & Lu Zhang, 2009. "Investment-Based Expected Stock Returns," Journal of Political Economy, University of Chicago Press, vol. 117(6), pages 1105-1139, December.
    9. João F. Gomes & Amir Yaron & Lu Zhang, 2006. "Asset Pricing Implications of Firms' Financing Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1321-1356.
    10. Carole Comerton‐Forde & Terrence Hendershott & Charles M. Jones & Pamela C. Moulton & Mark S. Seasholes, 2010. "Time Variation in Liquidity: The Role of Market‐Maker Inventories and Revenues," Journal of Finance, American Finance Association, vol. 65(1), pages 295-331, February.
    11. Jonathan B. Berk & Richard C. Green & Vasant Naik, 1999. "Optimal Investment, Growth Options, and Security Returns," Journal of Finance, American Finance Association, vol. 54(5), pages 1553-1607, October.
    12. Toni M. Whited & Guojun Wu, 2006. "Financial Constraints Risk," The Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 531-559.
    13. Gopalan, Radhakrishnan & Kadan, Ohad & Pevzner, Mikhail, 2012. "Asset Liquidity and Stock Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(2), pages 333-364, April.
    14. Ron Giammarino & Murray Carlson & Adlai Fisher, 2004. "Corporate Investment and Asset Price Dynamics: Implications for Post-SEO Performance," 2004 Meeting Papers 812, Society for Economic Dynamics.
    15. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
    16. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    17. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    18. Dmitry Livdan & Horacio Sapriza & Lu Zhang, 2009. "Financially Constrained Stock Returns," Journal of Finance, American Finance Association, vol. 64(4), pages 1827-1862, August.
    19. Grossman, S.J. & Miller, M.H., 1988. "Liquidity And Market Structure," Papers 88, Princeton, Department of Economics - Financial Research Center.
    20. Eckbo, B. Espen & Masulis, Ronald W. & Norli, Oyvind, 2000. "Seasoned public offerings: resolution of the 'new issues puzzle'," Journal of Financial Economics, Elsevier, vol. 56(2), pages 251-291, May.
    21. repec:bla:jfinan:v:59:y:2004:i:6:p:2577-2603 is not listed on IDEAS
    22. Ritter, Jay R., 2003. "Investment banking and securities issuance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 5, pages 255-306, Elsevier.
    23. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    24. Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, February.
    25. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    26. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    27. John R. Becker‐Blease & Donna L. Paul, 2006. "Stock Liquidity and Investment Opportunities: Evidence from Index Additions," Financial Management, Financial Management Association International, vol. 35(3), pages 35-51, September.
    28. François Derrien & Ambrus Kecskés, 2013. "The Real Effects of Financial Shocks: Evidence from Exogenous Changes in Analyst Coverage," Journal of Finance, American Finance Association, vol. 68(4), pages 1407-1440, August.
    29. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    30. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    31. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    32. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    33. John R. Becker-Blease & Donna L. Paul, 2006. "Stock Liquidity and Investment Opportunities: Evidence from Index Additions," Financial Management, Financial Management Association, vol. 35(3), Autumn.
    34. Murray Carlson & Adlai Fisher & Ron Giammarino, 2006. "Corporate Investment and Asset Price Dynamics: Implications for SEO Event Studies and Long‐Run Performance," Journal of Finance, American Finance Association, vol. 61(3), pages 1009-1034, June.
    35. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boubaker, Sabri & Liu, Pei-Zhi & Ren, Yi-Shuai & Ma, Chao-Qun, 2024. "Do anti-corruption campaigns affect corporate environmental responsibility? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 91(C).
    2. Feng Niu & Liuzhen Zhang & Wunhong Su, 2023. "Association between state ownership participation and the performance of private firms: Evidence from China," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(4), pages 979-1006, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kang, Moonsoo & Khaksari, S. & Nam, Kiseok, 2018. "Corporate investment, short-term return reversal, and stock liquidity," Journal of Financial Markets, Elsevier, vol. 39(C), pages 68-83.
    2. Li, Xiafei & Luo, Di, 2019. "Financial constraints, stock liquidity, and stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    3. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    4. Tran, Ly Thi Hai & Hoang, Thao Thi Phuong & Tran, Hoa Xuan, 2018. "Stock liquidity and ownership structure during and after the 2008 Global Financial Crisis: Empirical evidence from an emerging market," Emerging Markets Review, Elsevier, vol. 37(C), pages 114-133.
    5. Craig W. Holden & Stacey Jacobsen & Avanidhar Subrahmanyam, 2014. "The Empirical Analysis of Liquidity," Foundations and Trends(R) in Finance, now publishers, vol. 8(4), pages 263-365, December.
    6. Erica X. N. Li & Dmitry Livdan & Lu Zhang, 2009. "Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 22(11), pages 4301-4334, November.
    7. Vayanos, Dimitri & Wang, Jiang, 2013. "Market Liquidity—Theory and Empirical Evidence ," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1289-1361, Elsevier.
    8. Banti, Chiara & Phylaktis, Kate & Sarno, Lucio, 2012. "Global liquidity risk in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 267-291.
    9. Chan, Konan & Lin, Yueh-Hsiang & Wang, Yanzhi, 2017. "Limits-to-arbitrage, investment frictions, and innovation anomalies," Pacific-Basin Finance Journal, Elsevier, vol. 43(C), pages 1-14.
    10. Moshirian, Fariborz & Qian, Xiaolin & Wee, Claudia Koon Ghee & Zhang, Bohui, 2017. "The determinants and pricing of liquidity commonality around the world," Journal of Financial Markets, Elsevier, vol. 33(C), pages 22-41.
    11. Jegadeesh, Narasimhan & Noh, Joonki & Pukthuanthong, Kuntara & Roll, Richard & Wang, Junbo, 2019. "Empirical tests of asset pricing models with individual assets: Resolving the errors-in-variables bias in risk premium estimation," Journal of Financial Economics, Elsevier, vol. 133(2), pages 273-298.
    12. Cooper, Ilan & Priestley, Richard, 2011. "Real investment and risk dynamics," Journal of Financial Economics, Elsevier, vol. 101(1), pages 182-205, July.
    13. Keming Li, 2021. "The effect of option trading," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-32, December.
    14. Lu Zhang, 2017. "The Investment CAPM," European Financial Management, European Financial Management Association, vol. 23(4), pages 545-603, September.
    15. Xede, James & Simon Peter Dak-Adzaklo, Cephas & Ofosu, Emmanuel & Wise Dodzidenu Adza, Solomon, 2023. "Competition laws, external financing and investment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 82(C).
    16. Bennett, Benjamin & Stulz, René & Wang, Zexi, 2020. "Does the stock market make firms more productive?," Journal of Financial Economics, Elsevier, vol. 136(2), pages 281-306.
    17. Nyborg, Kjell & Wang, Zexi, 2013. "Stock Liquidity and Corporate Cash Holdings," CEPR Discussion Papers 9535, C.E.P.R. Discussion Papers.
    18. Ding, Xiaoya (Sara) & Ni, Yang & Zhong, Ligang, 2016. "Free float and market liquidity around the world," Journal of Empirical Finance, Elsevier, vol. 38(PA), pages 236-257.
    19. Chen, Zhihong & Huang, Yuan & Kusnadi, Yuanto & John Wei, K.C., 2017. "The real effect of the initial enforcement of insider trading laws," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 687-709.
    20. Auer, Benjamin R. & Rottmann, Horst, 2019. "Have capital market anomalies worldwide attenuated in the recent era of high liquidity and trading activity?," Journal of Economics and Business, Elsevier, vol. 103(C), pages 61-79.

    More about this item

    Keywords

    Stock liquidity; Corporate investment; Financial constraints;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:revfin:v:33:y:2017:i:c:p:1-11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620170 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.