The Pricing of Liquidity Risk and Accounting Quality in Canada

Carl Brousseau

Accounting and Finance Research, 2015, vol. 4, issue 4, 127

Abstract: I investigate the pricing of liquidity risk and accounting quality in Canadian equity markets. I report evidence that security prices in Canada are significantly affected by liquidity risk, and that this association is significant throughout the year, with a spike in January. However, despite positive correlation between the accounting quality and liquidity factors, the accounting quality factor is not significantly different from zero except in January, and firm-specific estimates of exposure to the accounting quality factor (i.e. factor betas) have no predictive power for future returns. I conclude that while investments in accounting quality could possibly mitigate liquidity risk, accounting quality is unlikely to have a direct effect on the cost of capital of Canadian firms.

Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:afr111:v:4:y:2015:i:4:p:127

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