a2 School of Management, George Mason University, 4400 University Dr., MS 5F4, Fairfax, VA 22030. [email protected]
We study the relation between asset liquidity and stock liquidity. Our model shows that the relation may be either positive or negative depending on parameter values. Asset liquidity improves stock liquidity more for firms that are less likely to reinvest their liquid assets (i.e., firms with less growth opportunities and financially constrained firms). Empirically, we find a positive and economically large relation between asset liquidity and stock liquidity. Consistent with our model, the relation is more positive for firms that are less likely to reinvest their liquid assets. Our results also shed light on the value of holding liquid assets.
(Online publication January 24 2012)
We thank Joel Hasbrouck for graciously providing data on stock liquidity measures and Vanderbilt University’s Financial Markets Research Center for making available the data on bid-ask spreads. We are also grateful to Viral Acharya, Hendrik Bessembinder (the editor), Tarun Chordia, Paolo Fulghieri, Adriano Rampini, Gideon Saar (the referee), Ronnie Sadka, Mark Seasholes, and Avi Wohl; to seminar participants at American University, Barclays Global Investors, the 2009 European Finance Association meetings at Bergen and our discussant Erik Theissen, the 2009 Financial Intermediation Research Society conference at Prague and our discussant Sugato Bhattacharya, Hong Kong University of Science and Technology, George Mason University, Nanyang Technological University, Singapore Management University, the 2009 Microstructure conference at the Swiss National Bank and our discussant Gunther Wuyts, and Washington University for very helpful comments; and to Engin Kose and Anirudh Jonnavitula for assistance with data collection.