The effect of corporate investment on market frictions: implication for the stock price delay premium

ABSTRACT

We demonstrate the effect of corporate investment on market frictions by exploring the stock liquidity channel. Using the stock price delay premium as a proxy for market frictions, we find that higher corporate investment leads to lower premium for stocks whose price responds slowly to information. Moreover, this cross-sectional phenomenon is more pronounced during the low sentiment/liquidity period, which experiences lack of liquidity. We obtain qualitatively the same results in a battery of robustness checks. Overall, this study suggests that corporate investment alleviates market frictions by altering stock liquidity.

KEYWORDS:

• Corporate investment
• market frictions
• stock price delay premium
• stock liquidity

JEL CLASSIFICATION:

• G12
• G14

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ We exclude the pre-1974 data due to a limited number of observations after filtering.

² We also perform a variety of robustness tests. The analysis is available upon request.

³ In fact, this is the same result shown in the intersection of Row A-C and Column H-L in Table 1 because we calculate the risk-adjusted returns based on the Fama and French (1993) three-factor model in Table 1.

⁴ We utilize the time-series analysis based on the portfolio approach, not the cross-sectional regression analysis based on individual variables. Our main variable, PRD, is empirically estimated and, as a result, nosy. This nosiness causes the errors-in-variables problem in the cross-sectional regression.