Liquidity and capital structure

We examine the relation between equity market liquidity and capital structure. We find that firms with more liquid equity have lower leverage and prefer equity financing when raising capital. For example, after sorting firms into size quintiles and then into liquidity quintiles, the average debt-to-...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2009-11, Vol.12 (4), p.611-644
Main Authors: Lipson, Marc L., Mortal, Sandra
Format: Article
Language:English
Subjects:
Capital structure
Capital structure Liquidity Market microstructure
Liquidity
Market microstructure
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We examine the relation between equity market liquidity and capital structure. We find that firms with more liquid equity have lower leverage and prefer equity financing when raising capital. For example, after sorting firms into size quintiles and then into liquidity quintiles, the average debt-to-asset ratio of the most liquid quintiles is about 38% while the average for the least liquid quintiles is 55%. Similar results are observed in panel analyses with clustered errors and using instrumental variables. Our results are consistent with equity market liquidity lowering the cost of equity and, therefore, inducing a greater reliance on equity financing.
ISSN:1386-4181
1878-576X
DOI:10.1016/j.finmar.2009.04.002