The Value of Control and the Costs of Illiquidity

Albuquerque, Rui; Schroth, Enrique

doi:10.1111/jofi.12207

Cited by 44 publications

(5 citation statements)

References 70 publications

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“…The editor regrets an error in the Albuquerque and Schroth article () in the August 2015 issue. On page 1410, in the fifth sentence of the second paragraph it should read “This strong association captures the fact that most trades are concentrated in two regions of the scatter plot, with 74% of the trades with positive CAR exhibiting a positive BP and 75% of the trades with a negative CAR exhibiting a negative BP .”…”

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confidence: 99%

The Value of Control and the Costs of Illiquidity: Erratum

Albuquerque¹,

Schroth²

2015

The Journal of Finance

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confidence: 99%

The Value of Control and the Costs of Illiquidity: Erratum

Albuquerque¹,

Schroth²

2015

The Journal of Finance

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“…The variables controlled according to a summary of the literature by Madhavan (2000) are as follows: Closely held , Institution held , Volatility , Firm size , Listing years , NYSE , NASDAQ , and AMEX . To capture the effect of stockholder structures on liquidity (Albuquerque & Schroth, 2015; Brockman et al, 2009),

{italicClosely held}_{i, t}

and

{italicInsitution held}_{i, t}

are controlled and measured by the proportion of shares that are closely held and of shares that are held by institutions, respectively. To control the riskiness of the security,

{italicVolatility}_{i, t}

is measured by the standard deviation of annual stock returns.…”

Section: Methodsmentioning

confidence: 99%

Cultural dispersion and stock liquidity

Zhang

2023

Global Strategy Journal

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Research SummaryThis paper examines whether cultural dispersion of a multinational firm affects its stock trading in the market. The result shows that the stock liquidity negatively relates to the degree of cultural dispersion, suggesting it is costlier to trade stocks of culturally diverse firms. Among five measures of stock liquidity, Chae's (2005) turnover measure demonstrates the most consistent effect after addressing potential omitted variables and selection biases. A robustness test that extends our sample to include purely domestic firms confirms the main result of the negative effect of cultural dispersion. Furthermore, while the relation between cultural dispersion and stock liquidity may not be exactly linear, such a negative association overall holds. In addition, the influence of cultural dispersion on stock trading takes effects mainly through the agency and external information environment channels and is more pronounced for lower risk‐taking multinationals.Managerial SummaryThis result has three practical implications for investment management. First, it is important to consider the internal cultural diversity when investing multinational firms. Second, the evaluation of firm liquidity goes beyond financial fundamentals or market mechanism. When a firm increase its degree of informational complexity and unfamiliarity, it tends to decrease its attractiveness to investors. Last but not least, when investing globally, cultural differences is an important consideration. Using stock liquidity as a research platform, this study suggests that the effect of cultural difference is indeed material.

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“…It is well documented (Brunnermeier & Pedersen, 2008;Jiao & Sarkissian, 2021) that illiquidity risk in security indexes is sometimes a global issue in which traders face greater security discounts or fire sales. These illiquidity discounts may be as high as 20% (Albuquerque & Schroth, 2015). Several authors also contend that illiquidity risk results from liquidity mismatch between buyers and sellers in financial markets (Sarr & Lybek, 2002;Keating et al, 2016;Marozva, 2017).…”

Section: Introductionmentioning

confidence: 99%

Exploring illiquidity risk pre and during the COVID-19 pandemic era: Evidence from international financial markets

Enow

2023

JAI

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Research aims: Illiquidity risk is one of the complex issues that institutional investors and market participants continually face over time. It is because the constructs of illiquidity risk are sometimes complicated, robust, and not so evident in secondary markets. Hence, this study aims to empirically explore illiquidity risk before and during the COVID-19 pandemic to understand how much investors were expected to lose if they invested in stock markets during these periods.Design/Methodology/Approach: This study used a GARCH model and the Amihud illiquidity ratio to achieve its objective. Trading volumes and price returns for the JSE, CAC 40, DAX, Nasdaq, BIST 100, and SSE were from June 30, 2017, to June 30, 2019, and January 1, 2020, to December 31, 2021.Research findings: As expected, the findings revealed higher illiquidity risk during periods of financial distress, such as the COVID-19 pandemic. During the financial crisis, investors could lose up to $22268.44 a day in less developed markets, such as the JSE, while the average loss in developed markets ranged between $0.22 to $11.53 in the Nasdaq and DAX, respectively. On average, a much lower figure was observed before the financial crisis. The BIST100, CAC 40, DAX, and Nasdaq are excellent options for those seeking lower-risk premiums.Theoretical and Practitioner/Policy implication: Policies such as adequate market microstructure and greater transparency in trading are strongly recommended for less developed markets, especially during periods of financial distress. Also, the findings of this study provide valuable insight into short-term traders and market participants attracted to liquid markets, where they can easily enter and exit their positions with minimal transaction costs. To the author's knowledge, this paper is the first to model illiquidity risk in stock markets.Research limitation/Implication: It is possible that the current study did not accurately capture the cost of illiquidity in the sampled financial markets and cannot be applied to other financial markets.

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The Value of Control and the Costs of Illiquidity

Cited by 44 publications

References 70 publications

The Value of Control and the Costs of Illiquidity: Erratum

The Value of Control and the Costs of Illiquidity: Erratum

Cultural dispersion and stock liquidity

Exploring illiquidity risk pre and during the COVID-19 pandemic era: Evidence from international financial markets

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