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Water as an investment: liquid yet illiquid!

Author

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  • Yizheng Jin
  • Bin Li
  • Eduardo Roca
  • Victor Wong

Abstract

The water industry is in great need of further large investments to address existing severe water shortages worldwide which requires the participation of private sector investors. This industry is heavily infrastructure based and is therefore saddled with fixed assets-in-place or illiquid assets. This exposes the industry to what is termed as 'illiquidity risk', and hence, investors in this industry should be compensated for bearing this risk with an appropriate return premium (i.e. extra return). In this study, we provide evidence as to whether illiquidity risk indeed significantly affects returns in this industry. We examine the case of all 76 firms that compose the five major global water indices. After controlling for other factors that impact on returns, our results suggest that asset illiquidity is positively associated with stock returns. Specifically, water firms with a larger proportion of illiquid assets-in-place are observed to have greater stock returns than those with a smaller proportion of illiquid assets. Our results have important implications for the financing of water-related projects particularly those which involve the participation of investors from the private sector.

Suggested Citation

  • Yizheng Jin & Bin Li & Eduardo Roca & Victor Wong, 2016. "Water as an investment: liquid yet illiquid!," Applied Economics, Taylor & Francis Journals, vol. 48(9), pages 731-745, February.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:9:p:731-745
    DOI: 10.1080/00036846.2015.1085646
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    Cited by:

    1. Chung, Kenneth Hsien Yung & Li, Dan & Adriaens, Peter, 2023. "Technology-enabled financing of sustainable infrastructure: A case for blockchains and decentralized oracle networks," Technological Forecasting and Social Change, Elsevier, vol. 187(C).
    2. Piñeiro-Chousa, Juan & López-Cabarcos, M.Ángeles & Ribeiro-Soriano, Domingo, 2020. "Does investor attention influence water companies’ stock returns?," Technological Forecasting and Social Change, Elsevier, vol. 158(C).
    3. Cristiana Fiorelli & Marco Mele, 2017. "Water Gain: As a Common Good Becomes a Financial Opportunity," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 626-630.

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