The Effect of Stock Liquidity on Corporate Risk-Taking

Charles Hsu, Zhiming Ma, Liansheng Wu, Kaitang Zhou

Abstract: This study examines the effect of stock liquidity on corporate risk-taking behavior. We find that stock liquidity has a positive and significant effect on corporate risk-taking. We find consistent results when we use the Split Share Structure Reform (SSSR) in China as an exogenous shock to stock liquidity. We also investigate the channels through which stock liquidity affects risk-taking and find that increases in stock liquidity lower the cost of capital and increase the pay-for-performance sensitivity of managers. Finally, we conduct cross-sectional tests to rule out privatization as an alternative explanation for our results. Our study sheds light on the real effects of stock liquidity and contributes to the understanding of capital market development.

Paper link: https://doi.org/10.1177/0148558X18798231

This article was published in Journal of Accounting, Auditing & Finance, Volume 35, Issue 4, 2020. The journal is a B+ journal of the School of Economics and Management, and the authors are sorted alphabetically by surname.