Asset liquidity and stock returns

Ze-To, S. 2016. Asset liquidity and stock returns. Advances in Accounting. 35, pp. 177-196. https://doi.org/10.1016/j.adiac.2016.08.002

TitleAsset liquidity and stock returns
TypeJournal article
AuthorsZe-To, S.
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.

KeywordsAsset liquidity
Cross sectional return
Asset productivity
JournalAdvances in Accounting
Journal citation35, pp. 177-196
ISSN0882-6110
2590-1699
Year2016
PublisherElsevier
Digital Object Identifier (DOI)https://doi.org/10.1016/j.adiac.2016.08.002
Publication dates
PublishedDec 2016

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