The Effect of Stock Liquidity on Corporate Risk-Taking

This study examines the effect of stock liquidity on corporate risk-taking behavior. We find that stock liquidity has a positive and significant effect on corporate risk-taking. We find consistent results when we use the split share structure reform (SSSR) in China as an exogenous shock to stock liquidity. We also investigate the channels through which stock liquidity affects risk-taking and find that increases in stock liquidity lower the cost of capital and increase the pay-for-performance sensitivity of managers. Finally, we conduct cross-sectional tests to rule out privatization as an alternative explanation for our results. Our study sheds light on the real effects of stock liquidity and contributes to the understanding of capital market development.