Equity Liquidity and Firm Investment: Evidence from Pakistan

Abstract

This paper examines how equity liquidity affects firms’ investment decisions. We use an unbalanced panel data for a sample of 360 non-financial firms of Pakistan for the period 2001-2016. We apply the Hausman specification test to identify whether fixed or random effects model is appropriate. Using two alternative measures of equity liquidity, we find that equity liquidity has a significant positive impact on firms’ investment decisions. We also show that several firm-specific factors are significant in determining firms’ investment policy. The findings of the paper have significant implications for both policymakers and firm managers. Our results support the liquidity premium hypothesis.