Financial Markets’ Production of Liquidity, Assets Valuation and Cost of Financing

Do more liquid firms create more value? At first glance, liquidity should at best have a second-order effect on firm valuation. However, several economic theories supported by strong empirical evidence document that investors require higher expected returns as a compensation for the costs and the risks that they bear when holding illiquid assets. In addition, illiquidity is responsible for the increase of direct and indirect issuing costs.