Stock Liquidity and Frim Investment—Evidence from Chinese Listed Companies*

Abstract

From the perspective of market microstructure, this paper investigates the relationship between stock liquidity, firm investment and capital allocation efficiency. This paper finds that firm investment is positively related to stock liquidity. Moreover, financial constraint, firm growth and risk affect the relationship between firm investment and stock liquidity. In addition, stock liquidity can help firm better utilize investment opportunities, indicated by higher investment and Tobin’ Q sensitivities. We also show that firms with good liquidity can lower the investment and Tobin’s Q sensitivities when there are no good investment opportunities. The findings of this paper indicate that stock liquidity have positive effect on firm investment. Therefore, to strengthen the effectiveness of stock liquidity, the Chinese government should continue to reform ownership structure and corporate governance, strengthen information disclosure and stepped up its crackdown against inside trading.