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Stock Market Liquidity and Firm Performance: Wall Street Rule or Wall Street Rules?
Vivian W. Fang,
Tulane University
Thomas H. NOE, Tulane University
Sheri Tice, Tulane University
ABSTRACT. We find that firms with higher stock market liquidity have better industry-adjusted performance even after controlling for their shareholder rights provisions. This association is both statistically and economically significant and persists in econometric specifications that control for firm-level fixed effects, endogeneity, momentum factors, and small-firm effect. Moreover, stock market liquidity is not simply a substitute for shareholder rights. These results suggest that stock market liquidity improves the real economic efficiency of firms either because of its positive effect on the ability of relationship investors to discipline managers, or because it makes prices more informative to managers.
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