Abstract
This paper studies the impact of stock liquidity on future investments in emerging markets. Since stock liquidity is an important determinant of the cost of equity, we expect a positive relation between future investments and stock liquidity. We conjecture that this relation is more pronounced in financially constrained firms due to their limited access to external capital and less pronounced in weaker financially developed markets due to their lack of ability to mobilize capital. We find robust evidence of this relation, and the findings suggest that the relation is influenced by financial constraints and the degree of financial market development.
•This paper studies the impact of stock liquidity on firms’ future investments.•The sample consists of firms from 21 emerging markets spanning from 2000 to 2015.•The results provide supportive evidence of a positive association between stock liquidity and future investments.•The liquidity impact on future investments is found to be influenced by financial constraints and financial development.•The findings are robust to other determinants of investments and alternative measures of investments and stock liquidity.