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

• Autores: Zangina Isshaq, Robert Faff
• Localización: Journal of Business Finance & Accounting, ISSN-e 1468-5957, Vol. 43, Nº. 0, 2016, págs. 1121-1141
• Idioma: inglés
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• Resumen

  • 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. [ABSTRACT FROM AUTHOR]