Illiquidity and Price Informativeness

This paper shows that liquidity conditions are important determinants of the predictability of earnings. Liquid stock prices are more informative about future firm earnings growth than illiquid stock prices. Because information-related illiquidity can arise when uncertainty is high, we focus our ana...

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Bibliographic Details
Published in:Management science 2020-01, Vol.66 (1), p.334-351
Main Authors: Kerr, Jon, Sadka, Gil, Sadka, Ronnie
Format: Article
Language:English
Subjects:
aggregate earnings
Discovery
Earnings
expected earnings
expected returns
illiquidity
Liquidity
price informativeness
Prices
Stock prices
Uncertainty
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Summary:This paper shows that liquidity conditions are important determinants of the predictability of earnings. Liquid stock prices are more informative about future firm earnings growth than illiquid stock prices. Because information-related illiquidity can arise when uncertainty is high, we focus our analysis on evidence that noninformational liquidity affects price informativeness. Endogeneity is further addressed using controls for market uncertainty and several exogenous shocks as natural experiments. Thus, our results lend support for the impact of liquidity on price discovery. This paper was accepted by Lauren Cohen, finance.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2018.3154