Stock liquidity risk and the cross-sectional earnings-returns relationship

Isshaq, Zangina and Faff, Robert (2016) Stock liquidity risk and the cross-sectional earnings-returns relationship. Journal of Business Finance and Accounting, 43 9-10: 1121-1141. doi:10.1111/jbfa.12209


Author Isshaq, Zangina
Faff, Robert
Title Stock liquidity risk and the cross-sectional earnings-returns relationship
Journal name Journal of Business Finance and Accounting   Check publisher's open access policy
ISSN 1468-5957
0306-686X
Publication date 2016-10-01
Sub-type Article (original research)
DOI 10.1111/jbfa.12209
Open Access Status Not yet assessed
Volume 43
Issue 9-10
Start page 1121
End page 1141
Total pages 21
Place of publication Chichester, West Sussex, United Kingdom
Publisher Wiley-Blackwell Publishing
Language eng
Abstract We argue that a higher sensitivity to aggregate market-wide liquidity shocks (i.e., a higher liquidity risk) implies a tendency for a stock's price to converge to fundamentals. We test this intuition within the framework of the earnings-returns relationship. We find a positive liquidity risk effect on the relationship between return and expected change in earnings. This effect on the earnings-returns relationship is distinct from the negative effect observed for stock illiquidity level. Notably, the liquidity risk effect is evident (absent) during periods of neutral/low (high) aggregate market liquidity. We also show that the liquidity risk effect is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book-to-market; and (c) are profit making.
Keyword Earnings-returns relationship
Stock liquidity risk
Q-Index Code C1
Q-Index Status Provisional Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: HERDC Pre-Audit
UQ Business School Publications
 
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