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Stock liquidity and capital allocation efficiency: Evidence from Chinese listed companies

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  • Jiacai Xiong
  • Dongwei Su

Abstract

Based on market microstructure theories and evidence, this paper investigates the relationship between stock liquidity and capital allocation efficiency using Chinese listed companies from 1998 to 2011. This paper finds that stock liquidity helps improve investment efficiency, mitigating both overinvestment and underinvestment. This finding is robust to numerous sensitivity analyses, including controls for endogeneity and for the other known determinants of investment efficiency, the choice of the measure of stock liquidity and investment efficiency. Further analysis shows that stock liquidity improves corporate capital allocation efficiency by reducing agency costs and increasing the information content of share prices.

Suggested Citation

  • Jiacai Xiong & Dongwei Su, 2014. "Stock liquidity and capital allocation efficiency: Evidence from Chinese listed companies," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 2(3), pages 228-252, July.
    • Handle: RePEc:taf:rcjaxx:v:2:y:2014:i:3:p:228-252
    DOI: 10.1080/21697213.2014.959413
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    Cited by:

    1. He, Xiqiong & Gu, Xiang & Liu, Hao, 2023. "Stock liquidity and controlling shareholders' encroachment of private interests: Evidence from China," Finance Research Letters, Elsevier, vol. 56(C).
    2. Cheng Guo & Huang Rong & Zhaiting Yang & Stavros Sindakis & Sakshi Aggarwal, 2024. "Controlling Shareholder Pledges and Cost of Equity Capital: Analyzing Empirical Evidence from A-Share Listed Companies," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(2), pages 5914-5938, June.
    3. Ma, Guangyuan & Wang, Yihong & Xu, Yekun & Zhang, Limin, 2023. "The breadth of ownership and corporate earnings management," Finance Research Letters, Elsevier, vol. 52(C).

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