Stock Liquidity and Investment Opportunities: Evidence from Index Additions
22 Pages Posted: 14 Jul 2003
There are 2 versions of this paper
Stock Liquidity and Investment Opportunities: Evidence from Index Additions
Stock Liquidity and Investment Opportunities: Evidence from Index Additions
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: Suggested Citation
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