Index revisions, systematic liquidity risk and the cost of equity capital

Mazouz, Khelifa ORCID: https://orcid.org/0000-0001-6711-1715, Daya, Wael and Yin, Shuxing 2014. Index revisions, systematic liquidity risk and the cost of equity capital. Journal of International Financial Markets, Institutions and Money 33 , pp. 283-298. 10.1016/j.intfin.2014.07.009

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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 Amihud and Mendelson's (1986) 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. Chen et al., 2004 and Chen et al., 2006).

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HG Finance
Uncontrolled Keywords:	PDF uploaded in accordance with publisher's policy at http://www.sherpa.ac.uk/romeo/issn/1042-4431/ [accessed 10/10/14]
Publisher:	Elsevier
ISSN:	1042-4431
Date of First Compliant Deposit:	30 March 2016
Date of Acceptance:	20 July 2014
Last Modified:	16 Nov 2023 11:49
URI:	https://orca.cardiff.ac.uk/id/eprint/63876

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