TY - JOUR
T1 - The Effect of Stock Liquidity on the Firm's Investment and Production
AU - Amihud, Yakov
AU - Levi, Shai
N1 - Publisher Copyright:
© 2022 The Author(s). Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.
PY - 2023/3/1
Y1 - 2023/3/1
N2 - We propose that stock market liquidity affects corporate investment and production. Illiquidity, which raises firms' cost of capital, lowers investment in capital assets, R&D, and inventory. This effect holds after we control for endogeneity using exogenous liquidity events, the 2001 decimalization, and the 1997 Nasdaq reform and after employing instrumental variable estimation. Illiquidity affects investment regardless of firms' financial constraints. Consequently, illiquidity induces firms to adopt less capital-intensive production processes. Illiquid firms have higher marginal productivity of capital, greater labor input increases for given increases in assets, and lower operating leverage, which means lower reliance on fixed costs.
AB - We propose that stock market liquidity affects corporate investment and production. Illiquidity, which raises firms' cost of capital, lowers investment in capital assets, R&D, and inventory. This effect holds after we control for endogeneity using exogenous liquidity events, the 2001 decimalization, and the 1997 Nasdaq reform and after employing instrumental variable estimation. Illiquidity affects investment regardless of firms' financial constraints. Consequently, illiquidity induces firms to adopt less capital-intensive production processes. Illiquid firms have higher marginal productivity of capital, greater labor input increases for given increases in assets, and lower operating leverage, which means lower reliance on fixed costs.
UR - http://www.scopus.com/inward/record.url?scp=85160026190&partnerID=8YFLogxK
U2 - 10.1093/rfs/hhac036
DO - 10.1093/rfs/hhac036
M3 - ???researchoutput.researchoutputtypes.contributiontojournal.article???
AN - SCOPUS:85160026190
SN - 0893-9454
VL - 36
SP - 1094
EP - 1147
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 3
ER -