Abstract

AbstractEmployment growth (EG) is related to liquidity fundamentals of investment opportunities, firm health, and information environment and quality. This, in turn, implies that liquidity risk may play a role in explaining the relation between EG and stock returns. We find strong empirical evidence supporting the link between EG and liquidity risk. Stocks of high‐EG firms are more liquid and exposed to lower liquidity risk than stocks of low‐EG firms. After adjusting for liquidity risk, EG loses its power to predict returns.

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