Stock Size, Market Liquidity and Cost of Equity

Based on the illiquidity factor constructed by Amihud and the three-factor model proposed by Fama and French, we develop theoretical model about cost of equity under the condition of China's stock market, and analyze the effects of stock size and liquidity on the cost of equity. We also collect the stock data of SSE A share, SZSE A share and Chinext between 1995 and 2010 to test the relationship between those factors. The empirical evidence shows that stock size and liquidity both have significant effects on cost of equity, while the liquidity takes a major part in this process.