Empirical Essays on Stock Liquidity and Stock Return

Student thesis: Doctoral Thesis


This thesis provides a literature review of liquidity measures and empirical evidence of stock liquidity and stock return in the US stock market. Chapter 2 provides an extensive review of the literature on liquidity measures. Specifically, this chapter re-evaluates the existing liquidity measures with a primary focus on low-frequency measures, strengths, weaknesses, and their implications on asset pricing. The first empirical chapter tests the relationship between stock liquidity and asset pricing, using a new price impact ratio adjusted for the free float factor as an approximation of liquidity. The free float adjusted ratio is free from size bias and encapsulates the impact of trading frequency. It is more comprehensive than alternative price impact ratios because it incorporates the shares available to the public for trading. Using a data sample of all US listed companies over the time period of 1997-2017, this chapter provides evidence that the free float adjusted price impact ratio is superior to other price impact ratios used in the previous academic literature. I also discover that the chapter’s findings are robust to the financial crises between 2007-2009.

The second empirical chapter examines the joint effect of advertising intensity and product market competition on stock returns. Using a sample of the US market over the period from 1977 to 2018, I provide evidence that advertising is negatively associated with stock returns, and this correlation is stronger for firms in competitive industries. In addition, higher expected stock returns are seen in firms in competitive markets, compared to firms in concentrated industries, especially among low advertising intensity groups. My results are robust across alternative subsamples and product market competition measures. My empirical estimates support the positive causal effect of concentration on advertising.

The third empirical chapter studies the effect of corporate social responsibility (CSR) on stock performance in the face of hurricane strikes. Using a sample of non-financial public US firms between 1992 and 2012, I find a positive correlation between CSR engagement and stock return of hurricane-afflicted firms. I also provide evidence that stock liquidity measured by trading volume and the Amihud ratio is positively associated with CSR through hurricanes. Furthermore, these effects are mainly because of investing in external CSR categories, including Community, Human Rights, and Environment, on a long time basis. However, my results suggest that the positive impact of CSR and stock performance are induced through hurricane occurrence only. Overall, this thesis's findings contribute to the literature on stock liquidity and stock return by testing a new liquidity measure and new determinants of stock liquidity and stock return. This thesis also has important insights for academic research and professional practice. First, it provides evidence about a more comprehensive liquidity ratio, namely the free float adjusted price impact ratio. This measure is shown to be a more accurate approximation of stock liquidity. Moreover, the thesis suggests that advertising is negatively associated with stock return. As a result, firms should consider carefully before investing in advertising campaigns. Finally, the last empirical chapter about CSR indicates the insurancelike effects of CSR engagement on stock performance. It has important implications for the insurance policies of firms for a long time.
Date of AwardMar 2021
Original languageEnglish
SupervisorAndros Gregoriou (Supervisor) & Jerome Healy (Supervisor)

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