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Stock Market Liquidity and the Cost of Issuing Equity

Published online by Cambridge University Press:  06 April 2009

Alexander W. Butler ,
Gustavo Grullon  and
James P. Weston
Alexander W. Butler
Affiliation:
alex.butler@alumni.rice.edu, The University of Texas at Dallas, School of Management, Richardson, TX 75083
Gustavo Grullon
Affiliation:
grullon@rice.edu, Rice University, Jones Graduate School of Management, Houston, TX 77252.
James P. Weston
Affiliation:
westonj@rice.edu, Rice University, Jones Graduate School of Management, Houston, TX 77252.
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Abstract

We show that stock market liquidity is an important determinant of the cost of raising external capital. Using a large sample of seasoned equity offerings, we find that, ceteris paribus, investment banks' fees are significantly lower for firms with more liquid stock. We estimate that the difference in the investment banking fee for firms in the most liquid vs. the least liquid quintile is about 101 basis points or 21% of the average investment banking fee in our sample. Our findings suggest that firms can reduce the cost of raising capital by improving the market liquidity of their stock.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 40 , Issue 2 , June 2005 , pp. 331 - 348
Copyright
Copyright © School of Business Administration, University of Washington 2005

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