Asset liquidity and stock returns

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

We document the significant predictive power of firms’ asset liquidity in the cross section of subsequent stock returns. The annual return spread between portfolios featuring the highest and lowest levels of asset liquidity is significantly positive. Our proposed measure of asset liquidity outperforms those measures developed by Gopalan et al. (2012) in predicting returns. The asset liquidity anomaly also provides significantly positive alphas when controlling for the asset pricing factors in the Fama and French (1993) three-factor model and the Carhart (1997) four-factor model. Asset liquidity exhibits strong return forecasting power even after controlling for acknowledged cross-sectional determinants of return. The positive relation between asset liquidity and future returns tends to be stronger for firms with greater asset productivity, higher quality cash flow and lower capital investment.

Original languageEnglish
Pages (from-to)177-196
Number of pages20
JournalAdvances in Accounting
Volume35
DOIs
Publication statusPublished - 1 Dec 2016

Scopus Subject Areas

  • Accounting
  • Finance

User-Defined Keywords

  • Asset liquidity
  • Asset productivity
  • Cross sectional return

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