Stock liquidity and capital allocation efficiency: Evidence from Chinese listed companies

Larry Su, Jaicai Xiong

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Based on market microstructure theories and evidence, this paper investigates the relationship between stock liquidity and capital allocation efficiency using Chinese listed companies from 1998 to 2011. This paper finds that stock liquidity helps improve investment efficiency, mitigating both overinvestment and underinvestment. This finding is robust to numerous sensitivity analyses, including controls for endogeneity and for the other known determinants of investment efficiency, the choice of the measure of stock liquidity and investment efficiency. Further analysis shows that stock liquidity improves corporate capital allocation efficiency by reducing agency costs and increasing the information content of share prices.
Original languageEnglish
Pages (from-to)228-252
Number of pages25
JournalChina Journal of Accounting Studies
Volume2
Issue number3
Early online date20 Oct 2014
DOIs
Publication statusPublished - 2014

Keywords

  • capital allocation efficiency
  • market microstructure
  • stock liquidity
  • overinvestment
  • underinvestment

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