Abstract
ABSTRACT We demonstrate the effect of corporate investment on market frictions by exploring the stock liquidity channel. Using the stock price delay premium as a proxy for market frictions, we find that higher corporate investment leads to lower premium for stocks whose price responds slowly to information. Moreover, this cross-sectional phenomenon is more pronounced during the low sentiment/liquidity period, which experiences lack of liquidity. We obtain qualitatively the same results in a battery of robustness checks. Overall, this study suggests that corporate investment alleviates market frictions by altering stock liquidity.
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