Abstract
We examine the different impacts of stock liquidity on the stock returns across financially constrained and unconstrained firms due to different levels of information asymmetry. Our results show that financial constraints are highly correlated with liquidity and liquidity risk. More importantly, stock liquidity is a significant determinant of the cross-sectional stock returns for financially constrained firms, but it is insignificant for unconstrained firms. In addition, stock liquidity is a main driver of the different relations between financial constraints and stock returns. The liquidity premium accounts for the positive constraint premium, but it cannot be subsumed by the constraint premium.
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