Keywords
sources of financing
information asymmetry
stock liquidity
retained earnings
How to Cite
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Abstract
This paper aims to assess whether stock liquidity is related to the use of particular financing sources. Previous research indicates that stock liquidity mitigates the adverse effects of information asymmetry, suggesting that it may also influence companies’ choice of financing sources. The research sample consists of companies listed in fourteen Central and Eastern European countries. A set of statistical and econometric methods were used to test the hypotheses, in particular the Tobit models and the extended model of Shyam-Sunders and Myers (1999). The findings indicate that companies with more liquid shares finance their operations to a lesser extent from retained earnings than companies with less liquid shares. Thus, stock liquidity differentiates companies in terms of their preference for internal financing. The findings also suggest that stock liquidity differentiates companies’ choices of external financing sources. To a greater extent, however, this relates to the liquidity of a country’s entire equity market, rather than the liquidity of an individual company’s shares. The relationships between stock liquidity and the level of retained earnings, and between stock liquidity and the choice of external financing sources, are more pronounced in the group of companies more prone to the adverse effects of information asymmetry. This, in turn, confirms that stock liquidity affects the pecking order of corporate financing sources by alleviating the adverse effects of information asymmetry. The findings may be useful in particular for managers and market regulators as a motivation to improve the liquidity of listed shares.
Funding
National Science Centre (Poland) agreement no. 217/27/N/HS4/00751
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