The Value Impact of Stock Liquidity: An International Evidence

Abstract

This study addresses an important issue about the role of stock market in corporate finance by directly examining the effect of stock liquidity on firm value on a broad sample of firms from 53 countries for the period 1981-2010. Consistent with finance theory, we document a strong positive association between stock liquidity and firm value at both the firm and country levels. This finding is robust to alternative stock liquidity measures and is not driven by the endogeneity problem. We further explore how country characteristics on investor protection affect the value impact of liquidity. The results show that strong investor protection and transparent financial reporting environments magnify the importance of stock liquidity to firm value. However, global market integration weakens the effects of local country's investor protection regimes.