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Cash-flow news, market liquidity and liquidity risk

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  • Yi-Mien Lin
  • Yun-Sheng Hsu
  • Shieh-Liang Chen

Abstract

This article adopts Campbell's (1991) return decomposition model to decompose the unexpected stock return and unexpected excess stock return in the US stock market. The study also investigates the factors that cause the shock to stock return and excess stock return. We further examine the responses of stock market to cash-flow news, expected stock return news, expected excess stock return news and interest rate news. Last, we examine the reaction of market liquidity, liquidity risk and abnormal trading volume to cash-flow news, expected stock return news, expected excess stock return news and interest rate news. Our main findings are summarized as follows: first, cash-flow news is the main driver of stock return and excess stock return in stock market. Second, the dividend payout ratio is able to predict stock return and excess stock return. Third, under the model of stock return variance, unexpected market liquidity and unexpected liquidity risk are negatively related to expected stock return news, but not related to cash-flow news. Fourth, under the model of excess stock return variance, unexpected market liquidity and unexpected liquidity risk are negatively related to cash-flow news, expected excess stock return news, and interest rate news.

Suggested Citation

  • Yi-Mien Lin & Yun-Sheng Hsu & Shieh-Liang Chen, 2009. "Cash-flow news, market liquidity and liquidity risk," Applied Economics, Taylor & Francis Journals, vol. 41(9), pages 1137-1156.
    • Handle: RePEc:taf:applec:v:41:y:2009:i:9:p:1137-1156
    DOI: 10.1080/00036840601019158
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    2. Imad Moosa & Sulaiman Al-Abduljader, 2010. "A test of the news model of stock price determination in an emerging market: the case of Kuwait," Applied Financial Economics, Taylor & Francis Journals, vol. 20(5), pages 397-405.
    3. Kausar, Rabia & Qayyum, Abdul, 2018. "How Cash Flow News and Discount Rate News Impact the Unexpected Stock Returns of Energy Firms of Pakistan," MPRA Paper 91165, University Library of Munich, Germany.

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