Stock Liquidity Risk and the Cross-sectional Earnings-Returns Relationship

Zangina Isshaq, Robert Faff*

*Corresponding author for this work

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)
32 Downloads (Pure)


We argue that a higher sensitivity to aggregate market-wide liquidity shocks (i.e., a higher liquidity risk) implies a tendency for a stock's price to converge to fundamentals. We test this intuition within the framework of the earnings-returns relationship. We find a positive liquidity risk effect on the relationship between return and expected change in earnings. This effect on the earnings-returns relationship is distinct from the negative effect observed for stock illiquidity level. Notably, the liquidity risk effect is evident (absent) during periods of neutral/low (high) aggregate market liquidity. We also show that the liquidity risk effect is dominant in firms that: (a) are of intermediate size; (b) are of intermediate book-to-market; and (c) are profit making.

Original languageEnglish
Pages (from-to)1121-1141
Number of pages21
JournalJournal of Business Finance and Accounting
Issue number9-10
Publication statusPublished - 1 Oct 2016
Externally publishedYes


Dive into the research topics of 'Stock Liquidity Risk and the Cross-sectional Earnings-Returns Relationship'. Together they form a unique fingerprint.

Cite this