capital.Thesecondiscenteredontheliquidityoftheassets
owned by a firm.
Theliquidityorlackthereofofthesecuritiesissuedbyafirm
canhavesignificantconsequencesforalmosteveryaspectof
corporate finance.
- Ifweacceptthepropositionthatthecostof equity
includesapremium forilliquidity,lessliquidfirms
willhave highercosts ofequity (and capital) than
moreliquidfirms.Thereisalsosomeevidencethat
they face higher issuance costs in raising capital.
Using2,387seasonedequityofferingsfrom 1993 to
2000,Butler,Grullon,andWeston(2002)findthat,
aftercontrollingforotherfactors,investmentbanks
chargelowerfeesto firmswithmoreliquidstocks.
Theyalsofindthatthetimetocompleteaseasoned
equity offering declines with the level of market
liquidity.
82 - Turningtotheinvestmentdecision,theperceptionof
illiquidity can have consequences for the types of
investments thata firmwilltake.In general,firms
withilliquidsecuritieswillbelesswillingtoinvestin
long-term projects with significant negative cash
flowsintheearlyyears,eveniftheseprojectshave
positiveNPV,becauseoftheconcernthattheywill
be unable to fund these cash flows. - Firms with liquidsecurities canalso afford to pay
moreindividendsandretainlesscash,knowingthat
they can always raise fresh capital (with low
transactions costs) to fund shortfalls.