Liquidity Premium and Consumption

AbstractThis paper investigates how a firm’s capital structure choice affects the informational efficiency of its security prices in the secondary markets. We identify two new determinants of a firm’s capital structure policy: the liquidity (adverse selection) premium due to investors’ anticipated losses to informed trading, and operating efficiency improvement due to information revelation from the firm’s security prices. We show that the capital structure decision affects traders’ incentives to acquire information and subsequently, the distribution of informed traders across debt and equity claims. When information is less imperative for improving its operating decisions, a firm issues zero or negative debt (i.e., holding excess cash reserves) in order to reduce socially wasteful information acquisition and the liquidity premium associated with it. When information is crucial for a firm’s operating decisions, the optimal debt level is one that achieves maximum information revelation at the lowest possible liquidity cost. Our model can explain why many firms consistently hold no debt. It also provides new implications for financial system design and for the relationship among leverage, liquidity premium, profitability, and the cost of information acquisition.

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LIQUIDITY PREMIUM THEORY: SOME OBSERVATIONS

Kyklos ◽

10.1111/j.1467-6435.1969.tb02526.x ◽

1969 ◽

Vol 22 (1) ◽

pp. 155-213

Author(s):

William L. Silber

Keyword(s):

Liquidity Premium

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Market Makers and Liquidity Premium in Electricity Futures Markets

The Energy Journal ◽

10.5547/01956574.43.2.jpen ◽

2022 ◽

Vol 43 (2) ◽

Author(s):

Juan Ignacio Peña ◽

Rosa Rodríguez

Keyword(s):

Futures Markets ◽

Liquidity Premium ◽

Market Makers

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Conditional stock liquidity premium: is Warsaw stock exchange different?

Studies in Economics and Finance ◽

10.1108/sef-03-2020-0075 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Szymon Stereńczak

Keyword(s):

Emerging Markets ◽

Stock Returns ◽

Stock Exchange ◽

Emerging Market ◽

Market Liquidity ◽

Investment Horizon ◽

Liquidity Premium ◽

Stock Liquidity ◽

Content Type ◽

Bear Market

Purpose This paper aims to empirically indicate the factors influencing stock liquidity premium (i.e. the relationship between liquidity and stock returns) in one of the leading European emerging markets, namely, the Polish one. Design/methodology/approach Various firms’ characteristics and market states are analysed as potentially affecting liquidity premiums in the Polish stock market. Stock returns are regressed on liquidity measures and panel models are used. Liquidity premium has been estimated in various subsamples. Findings The findings vividly contradict the common sense that liquidity premium raises during the periods of stress. Liquidity premium does not increase during bear markets, as investors lengthen the investment horizon when market liquidity decreases. Liquidity premium varies with the firm’s size, book-to-market value and stock risk, but these patterns seem to vanish during a bear market. Originality/value This is one of the first empirical papers considering conditional stock liquidity premium in an emerging market. Using a unique methodological design it is presented that liquidity premium in emerging markets behaves differently than in developed markets.

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