Stock Liquidity and Investment Opportunities: Evidence from Index Additions

22 Pages Posted: 14 Jul 2003

See all articles by John R. Becker-Blease

John R. Becker-Blease

Washington State University, Vancouver

Donna L. Paul

Washington State University

Multiple version iconThere are 2 versions of this paper

Date Written: March 2006

Abstract

We examine the relation between stock liquidity and investment opportunities in a sample of firms experiencing an exogenous liquidity shock. We find a positive relation between changes in capital expenditures and changes in stock liquidity, indicating that stock liquidity influences corporate investment decisions. This relation is robust to alternative measures of growth opportunities, and is consistent with a liquidity premium in equity returns. That is, an increase in liquidity effectively expands the set of positive NPV projects because it reduces the cost of capital. The results suggest that liquidity-enhancing events benefit shareholders by increasing the pool of viable growth opportunities.

Keywords: Stock liquidity, investment opportunities, capital expenditures

JEL Classification: G31, G12

Suggested Citation

Becker-Blease, John R. and Paul, Donna L., Stock Liquidity and Investment Opportunities: Evidence from Index Additions (March 2006). Available at SSRN: https://ssrn.com/abstract=405842 or http://dx.doi.org/10.2139/ssrn.405842

John R. Becker-Blease

Washington State University, Vancouver ( email )

1812 E. McLaughlin Blvd.
Vancouver, WA 98663-3597
United States
360.546.9146 (Phone)
360.546.9037 (Fax)

Donna L. Paul (Contact Author)

Washington State University ( email )

Carson College of Business
WA
United States

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