Stock liquidity and corporate diversification: Evidence from China’s split share structure reform

Lifeng Gu, Yixin Wang, Wentao Yao and Yilin Zhang

Journal of Empirical Finance, 2018, vol. 49, issue C, 57-80

Abstract: We establish that stock liquidity is conducive to less corporate diversification. Two potential channels are identified: the financial constraint channel and the corporate governance channel. Specifically, the negative effect of liquidity on diversification is stronger among financially-constrained firms, since higher liquidity helps firms improve external capital markets and thus reduces the need to broaden the internal capital markets through diversification. Moreover, the effect of liquidity on diversification is strengthened among firms with severe information asymmetry, since enhanced price informativeness caused by increased liquidity promotes market monitoring and deters managers’ opportunistic diversification decisions. Meanwhile, we rule out the alternative explanation that liquidity discourages diversification by facilitating blockholders’ monitoring on managers’ decisions. Our results suggest that stock liquidity plays a positive role in corporate decision making.

Keywords: Stock liquidity; Corporate diversification; Financial constraint; Agency problem; Corporate governance; Split share structure reform; China (search for similar items in EconPapers)
JEL-codes: G14 G30 L25 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539818300690
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:49:y:2018:i:c:p:57-80

DOI: 10.1016/j.jempfin.2018.09.002

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().