Stock extreme illiquidity and the cost of capital

Mohamed Belkhir, Mohsen Saad, Anis Samet

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)

Abstract

We examine the relationship between stock extreme illiquidity and the implied cost of capital for firms from 45 countries. We document robust evidence that firms whose stocks have a greater potential for extreme illiquidity realizations suffer from higher cost of capital. A one standard deviation increase in a stock's liquidity tail index leads to a rise of 30 basis points in the cost of equity. The reported evidence for stock extreme illiquidity is independent of the systematic extreme liquidity risk and extends to alternative cost-percent liquidity proxies. We further find that this relation is stronger in periods of down markets and high volatility and is weaker in environments with better information quality and stronger investor protection.

Original languageEnglish
Article number105281
JournalJournal of Banking and Finance
Volume112
DOIs
Publication statusPublished - Mar 2020
Externally publishedYes

Keywords

  • Cost of capital
  • Extreme illiquidity
  • Institutions
  • Liquidity
  • Market conditions

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Fingerprint

Dive into the research topics of 'Stock extreme illiquidity and the cost of capital'. Together they form a unique fingerprint.

Cite this