Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

this finding by showing a positive relationship between
returns and spreads for NASDAQ stocks.
27 Other studieshaveused tradingvolume,turnoverratios
(dollartradingvolume/marketvalueofequity),andilliquidity
ratios as proxies for illiquidity with consistent results.
BrennanandSubrahmanyam(1996)breaktransactionscosts
downintofixedand variablecosts and find evidenceofa
significanteffectonreturnsduetothevariablecostoftrading
aftercontrollingforfactorssuchasfirmsizeandthemarket
to book ratio.
28 Brennan,Chordia, and Subrahmanyam (1998)find that
dollar trading volume and stock returns are negatively
correlated, after adjusting for other sources of market risk.
29 Datar,Naik,andRadcliffe(1998)usetheturnoverratioas
a proxy for liquidity. After controlling for size and the
market-to-book ratio, they conclude that liquidity plays a
significantroleinexplainingdifferencesinreturns,withmore
illiquidstocks(in the10thpercentile oftheturnoverratio)
havingannualreturnsthatareabout3.25percenthigherthan
liquidstocks(inthe90thpercentileoftheturnoverratio).In
addition,theyconcludethatevery 1 percentincrease inthe
turnoverratioreducesannualreturnsbyapproximately0.54
percent.
30 Amihud (2002) developed a measure of illiquidity by
dividing the absolute price change by the average daily
tradingvolumeforthestockto estimateanilliquidity ratio
andconcludedthatstockreturnsarepositivelycorrelatedwith
this measure.
31 Nguyen,Mishra,andPrakash(2005)concludethatstocks
with higher turnover ratios do have lower expected returns.
32 Theyalsofindthatmarketcapitalizationandprice-to-book
ratios, two widely used proxies that have been shown to