Financial constraints, stock liquidity, and stock returns

Li, Xiafei; Luo, Di

Abstract

This paper examines stock liquidity in explaining the mixed relations between financial constraints and stock returns and the pricing of stock liquidity across financially constrained and unconstrained firms. We find a negative relation in liquid portfolios and a positive relation in illiquid portfolios. Financially constrained firms have higher liquidity risk and earn a higher illiquidity premium than unconstrained firms. Financial constraints cannot be independently priced in stock returns and can only be priced in conjunction with stock liquidity in bad economic times. Stock liquidity is independently priced for financially constrained firms or in good times, but not for unconstrained firms.

Citation

Li, X., & Luo, D. (2019). Financial constraints, stock liquidity, and stock returns. Journal of International Financial Markets, Institutions and Money, 63, Article 101139. https://doi.org/10.1016/j.intfin.2019.101139

• Journal Article Type: Article
• Acceptance Date: Oct 29, 2019
• Online Publication Date: Nov 4, 2019
• Publication Date: 2019-11
• Deposit Date: Nov 6, 2019
• Publicly Available Date: Nov 5, 2020
• Journal: Journal of International Financial Markets, Institutions and Money
• Print ISSN: 1042-4431
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 63
• Article Number: 101139
• DOI: https://doi.org/10.1016/j.intfin.2019.101139
• Keywords: JEL classification: G12; G14; G32 Keywords: Asset pricing; financial constraints; stock liquidity; macroeconomic conditions
• Public URL: https://nottingham-repository.worktribe.com/output/3069499
• Publisher URL: https://www.sciencedirect.com/science/article/pii/S1042443119301878
• Additional Information: This article is maintained by: Elsevier; Article Title: Financial constraints, stock liquidity, and stock returns; Journal Title: Journal of International Financial Markets, Institutions and Money; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.intfin.2019.101139; Content Type: article; Copyright: © 2019 Elsevier B.V. All rights reserved.