Mazouz, K., Daya, W. and Yin, S. (2014) Index revisions, systematic liquidity risk and the cost of equity capital. Journal of International Financial Markets, Institutions and Money, 33. 283 - 298. ISSN 1042-4431
Abstract
This study investigates the impact of FTSE100 index revisions on firms' systematic liquidity risk and the cost of equity capital. We show that index membership enhances all aspects of liquidity, whereas stocks that leave the index exhibit no significant liquidity change. We also show that the liquidity risk premium and the cost of equity capital decline significantly after additions, but do not exhibit any significant change following deletions. The control sample analysis indicates that observed decline in liquidity premium and the cost of equity capital is not driven by factors other than index revisions. Our evidence is consistent with Journal of Financial Economics, 1, 17 (1986)'s argument that since liquidity is priced, an increase in liquidity will result in lower expected returns. Furthermore, the asymmetric impact of additions and deletions on stock liquidity and cost of capital is consistent with the view that the benefits of index membership are permanent (see, e.g. Journal of Finance, 59, No. 4 1901-29, August 2004; Journal of Investment Management 4, 23-37, 2006).
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2014 Elsevier. This is an author produced version of a paper subsequently published in Journal of International Financial Markets, Institutions and Money. Uploaded in accordance with the publisher's self-archiving policy. |
Keywords: | Cost capital; FTSE 100 index revision; Liquidity risk premium; Stock liquidity |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Management School (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 22 Dec 2014 10:54 |
Last Modified: | 20 Apr 2015 16:05 |
Published Version: | http://dx.doi.org/10.1016/j.intfin.2014.07.009 |
Status: | Published |
Publisher: | Elsevier Ltd |
Refereed: | No |
Identification Number: | 10.1016/j.intfin.2014.07.009 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:82547 |