Illiquidity and Earnings Predictability

Jon N. Kerr, Gil Sadka, Ronnie Sadka
2011 Social Science Research Network  
This paper studies the relation between illiquidity and the predictability of fundamental valuation variables. Theory suggests that illiquidity increases during periods of uncertainty about stock value. Consistent with this prediction, we document that during illiquid periods aggregate stock returns contain less information about future aggregate earnings, GNP growth, and industrial production. In addition, a ...rm-level cross-sectional analysis shows that returns of illiquid stocks contain
more » ... information about their future ...rm earnings compared to those of more liquid stocks. Finally, we document that analyst-forecast error and analyst-forecast dispersion are higher for more illiquid stocks. The results provide further evidence for the impact of illiquidity on fundamental value. JEL classi...cation: E32, G12, G14, M41
doi:10.2139/ssrn.1776082 fatcat:evr66ztygfc2famquab6rl36ou