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Monetary Policy Adjustment, Corporate

Investment, and Stock Liquidity—Empirical
Evidence from Chinese Stock Market

Huaping Zhang, Jianhua Ye, Feifei Wei, Rafique Kashif & Ceyuan Cao

To cite this article: Huaping Zhang, Jianhua Ye, Feifei Wei, Rafique Kashif & Ceyuan Cao
(2019): Monetary Policy Adjustment, Corporate Investment, and Stock Liquidity—Empirical
Evidence from Chinese Stock Market, Emerging Markets Finance and Trade, DOI:
10.1080/1540496X.2019.1612363

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Emerging Markets Finance & Trade, 1–16, 2019
Copyright © Taylor & Francis Group, LLC
ISSN: 1540-496X print/1558-0938 online
DOI: https://doi.org/10.1080/1540496X.2019.1612363

Monetary Policy Adjustment, Corporate Investment, and

Stock Liquidity—Empirical Evidence from Chinese Stock
Market
Huaping Zhang1, Jianhua Ye2, Feifei Wei1, Rafique Kashif1, and Ceyuan Cao1
1
School of Management and Economics, North China University of Water Resources and Electric
Power, Zhengzhou, China; 2School of Accounting, Henan University of Economics and Law,
Zhengzhou, China

ABSTRACT: With the tightening monetary policy gradually exiting and the increasing attention to market
value management, stock liquidity has become a research focus. Based on the actual situation of China’s
capital market, this article empirically studies the impacts of corporate investment on stock liquidity and
the underlying influencing mechanism. The study found that (1) the investment of A-share listed
companies significantly reduced the market risk level of the corporate stocks and enhanced the stock
liquidity; (2) corporate market risk has partial mediating effect on the relationship between corporate
investment and stock liquidity; (3) during the tightening monetary policy period and in firms with high
financial constraints, corporate investment has more positive effect on stock liquidity, and the mediating
effect of corporate market risk is more obvious. This study clarifies the influencing mechanism of micro
corporate investment and macro monetary policies on stock liquidity, and enriches the research on
determinants of stock liquidity. Finally, based on the conclusions, this article puts forward policy
recommendations on the credit resource allocation structure, investor education, corporate investment
evaluation, and corporate market value management.
KEY WORDS: corporate investment, corporate market risk, monetary policy, stock liquidity
JEL classification: E44, G11

Stock liquidity refers to the difficulty of trading large stocks with the minimum cost, the minimum
price impact, and the fastest speed, including market width, depth, flexibility, and immediacy. It is the
main content of market microstructure research. Stock liquidity affects agency cost and company
performance through the major shareholder supervision mechanism, shareholder exit threat mechan-
ism, management opportunism mechanism, and manager compensation contract mechanism (Xiong
and Su 2016). In the capital market, stock liquidity is also an important asset pricing factor that
affects market efficiency, transaction costs, expected rate of return, and overall financial stability
(Chorida et al., 2001). Many important reform initiatives including the reform of non-tradable shares,
the mixed ownership reform of state-owned enterprises (SOEs), and the reform of registration-based
stock-issuing system currently under discussion in China all have one key purpose in common, that
is, to increase stock liquidity. With the tightening monetary policy gradually exiting, corporate stock
liquidity has increasingly become a factor to be considered in decision-making by company execu-
tives. In view of the important impact of stock liquidity on capital market resources allocation
efficiency and corporate governance, it has become very important in corporate finance research to
explore the decisive factors to and the economic consequences of stock liquidity.
Early literatures mostly studied the economic consequences of corporate stock liquidity in asset
pricing. Many theoretical literatures (Acharya and Pedersen, 2005) and empirical ones (Amihud
2002; Su and Mai 2004) proved that stock liquidity is an important factor affecting stock returns. If

Address correspondence to Huaping Zhang, North China University of Water Resources and Electric Power,
Zhengzhou 450046, China. E-mail: zhanghuaping@ncwu.edu.cn
2 H. ZHANG ET AL.

the stock liquidity increases, there will be more noise trading, increasing the extent of stock
mispricing, aggravating the stock volatility, and also increasing corporate default risks (Polk and
Sapienza 2009). Fang, Tian, and Tice (2014) proved that stock liquidity can increase company value.
High stock liquidity improves corporate governance and increases price efficiency by reducing the
exit difficulty of investors (Su and Mai 2004). Li, Wang, and Lu (2016) found that there are obvious
reversal effects and liquidity premium effects in Shanghai and Shenzhen stock markets in China. The
stock liquidity factor is not entirely a potential explanatory factor to stock returns.
Recent literatures began to focus on the impact of stock liquidity on corporate governance and
corporate financial behaviors. Admati and Pfleiderer (2009) found that stock liquidity helps enhance
the exit threat of major shareholders, thereby limiting the opportunistic behavior of managers. Higher
stock liquidity makes it likely for major shareholders to sell stocks, and the exit threat of major share-
holders is an effective corporate governance mechanism (Edmans, Fang, and Zur 2013). Jayaraman and
Milbourn (2012) found that the percentages of return on equity in CEO’s total compensation and CEO’s
pay-stock price sensitivity are both significantly positively correlated with stock liquidity. Fang, Tian, and
Tice (2014) found that stock liquidity has an important impact on company activities, and that the
enhancement of the corporate stock liquidity will weaken a company’s technological innovation.
Bharath, Jayaraman, and Nagar (2013) studied the impact of liquidity on the exit threat of major
shareholders and concluded that liquidity magnifies the impact of large shareholders on company
value. Edmans, Fang, and Zur (2013) found that higher stock liquidity makes large shareholder govern-
ance shift from voting rights to exit threats. Fang, Tian, and Tice (2014) found that the increase in stock
liquidity reduces a company’s innovation. Norli et al. (2015) discovered that higher stock liquidity can
increase shareholders’ activism. Hu, Li, and Qiao (2016) found that when external impacts lead to an
increase in stock liquidity, more institutional investors will be attracted to become shareholders. As
institutional investors pay more attention to short-term performance, it will prompt corporate executives
to become shorter-sighted and reduce innovation expenditures. Xiong and Su (2016) proved using
a stochastic frontier model that, the corporate stock liquidity helps reduce agency costs, but that this
effect is less obvious in state-controlled listed companies. Su and Xiong (2013) found that increasing
stock price informativeness and reducing agency costs can help alleviate underinvestment and curb
overinvestment. Lu (2015) found that the high liquidity of stocks prompts a company to issue new stocks,
thereby increasing its investment level. Feng et al. (2017) believed that the increase of stock liquidity
reduces the technological innovation of private enterprises. With the continuous improvement of the
assessment methods for and the diversification of SOEs, the increase of stock liquidity will help promote
the technological innovation of enterprises. Chen et al. (2015) found that stock liquidity mitigates short-
sighted behavior in corporate earnings management. Jiang, Ma, and Shi (2017) discovered that stock
liquidity is significantly negatively correlated with a company’s dividend payout ratio and that this
correlation is more pronounced in companies with low information transparency and serious conflicts
of interest between shareholders.
There are also some literatures that investigated the impacts of exogenous factors on stock liquidity.
Baker and Stein (2004) pointed out that in markets with short-sale constraints, liquidity can be seen as
a mood indicator and an indicator of whether rational or irrational investors exist in the market. When the
market is highly liquid, the irrational investors are in a positive mood. Baker and Wurgler (2006) used
liquidity as a variable to construct the emotional indicator, suggesting that the investors’ mood has
a significant impact on cross-sectional stock prices. Hameed, Kang, and Viswanathan (2010) found that
when the capital market financing becomes difficult, the stock returns decline and that the liquidity is
reduced. When international investors are entering the market or the market is highly volatile, the market
liquidity is enhanced. The economic cycle is closely related to market liquidity.
All the above studies have assumed that stock liquidity is determined by exogenous factors, but
recent studies have found that micro corporate factors such as corporate investment also affect stock
liquidity. Private information and market liquidity supply and demand condition are two key factors
affecting stock liquidity (Kyle 1985). Changes in the corporate market risk affect investors’
 MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY 3

information status and demand for liquidity, which in turn affect stock liquidity. Kyle (1985) argued
that in the equilibrium state, stock risk is negatively correlated with stock liquidity. Corporate
investment, as the most important financial activity, means that the company converts the growth
options into assets-in-place and the corporate market risk level decreases accordingly. Therefore, it is
reasonable to expect that corporate investment can change a company’s stock liquidity by changing
the corporate market risk level. Consistent with this intuitive judgment, Kang, Wang, and Eom (2017)
demonstrated that in the US stock market, the corporate investment did change a company’s stock
liquidity. Some literatures also examined the impacts of some characteristic factors like board
independence and ownership structure (Ali, Liu, and Su 2017) and board gender structure (Ahmed
and Ali 2017) on stock liquidity. Schoenfeld (2017) found that as a company’s voluntary accounting
information disclosure increases, its stock liquidity will also increase.
In the context of the Chinese system, the capital market development and the corporate financing
diversification are both at relatively low levels, and bank-led debt financing still remains the main
source of funding for enterprises. A company’s investment behavior is not only affected by the
amount of profitable investment opportunities, but also closely related to its own financial constraints
and the macro monetary policy. Corporate investment friction and external monetary policy impacts
may affect corporate investment behavior to a greater extent. In this context, does Chinese listed
companies still enhance stock liquidity by lowering corporate market risk? Does the mechanism of
corporate investment affecting the stock liquidity have anything to do with the degree of corporate
financial constraints and the macro monetary policy? The study finds that Chinese companies
(especially those with higher degree of financial constraints) increase their stock liquidity by reducing
their stock risk. This influence mechanism is more obvious during the tightening monetary policy
period. The findings of this article not only enrich the research on the micro prior factors to stock
liquidity and the micro post effects of the monetary policy, but also have important implications for
corporate investment, market value management decision-making, and monetary policy formulation.

1. Theoretical Analysis and Hypotheses

1.1. Influence Mechanism of the Corporate Investment on the Stock Liquidity
Based on the real option theory and the Q theory of investment, it is reasonable to expect that
corporate investment will reduce corporate market risk. According to the real option theory, Berk,
Richard, and Vasant (1999) argued that corporate value and corporate risk are determined by low-risk
assets-in-place and high-risk growth options, and corporate investment converts growth options into
assets-in-place. For a company, the growth opportunities are limited. The company’s investment
decisions reduce the ratio of its growth options to the assets-in-place, and the company’s overall risk
level decreases accordingly. This means that even if the company’s new assets are risky, corporate
investment will still reduce its overall risk. The company’s stock risk is related to its current and
historical investment decisions (Carlson, Fisher, and Giammarino 2004). The Q theory of investment
also predicts that there is a negative correlation between corporate risk and corporate investment.
According to this theory, enterprises will choose the optimal investment level, which means that, if
the expected return rate or discount rate of capital changes dynamically with time, when the expected
rate of return is low and the net present value of the new investment is high, the company will tend to
increase its investment, and vice versa. When there is investment friction, corporate investment can
reduce the company’s risk to a greater extent. Li and Zhang (2010) introduced the investment friction
factors into the Q theory and believed that when there is no investment friction, corporate investment
will fully respond to the expected rate of return; and when there is investment friction or heavy cost
of investment, corporate investment cannot fully respond to the changes in the expected rate of
return. From this, it can be found that the risk of a company (expected rate of return) facing serious
financial constraints changes more significantly than that of the one with no or low financial
constraints, given the unit investment change. There is a negative correlation between the corporate
4 H. ZHANG ET AL.

investment level and subsequent stock returns, and in companies with more severe financial con-
straints, this negative correlation is even greater (Lam and Wei 2011).
According to the theory about the determinants of stock liquidity, corporate risk affects stock
liquidity through two channels. Stock liquidity is influenced by transaction motives such as private
information and liquidity (Kyle 1985). Since both types of transaction motives are related to the
company’s stock risk, the changes of the latter will make market makers change the pricing strategies,
which will further affect stock price performance. Specifically, Kyle (1985) suggests that in the
equilibrium state, the stock risk is negatively correlated with the stock liquidity. Recent literatures
further proved that there is a negative correlation between the systemic stock risk and the stock
liquidity (Brunnermeier and Pedersen 2009). The research of Kang, Wang, and Eom (2017) on the
US stock market shows that corporate investment reduces corporate risk, and the risk changes alter
the trading behavior of market makers and reduce the corporate stock liquidity. Overall, regardless of
the source or structure, the stock risk is in a negative correlation with the stock liquidity. In summary,
it can be concluded that corporate investment can reduce corporate market risk and enhance stock
liquidity. Based on this, the following hypothesis is made:
Hypothesis 1: Corporate investment will reduce the corporate market risk and increase the stock liquidity,
and the corporate market risk plays a mediating role in the corporate investment–stock liquidity
relationship.

1.2. Financial Constraints, Corporate Investment, and Stock Liquidity

The intensity of the mechanism where the corporate investment increases the company’s stock
liquidity by reducing the corporate risk is related to the corporate investment friction. In a perfect
capital market, the corporate investment and financing have nothing to do with each other, and
a company’s investment level depends on the amount of profitable investment opportunities.
However, in an imperfect market, the company often suffers from investment friction, and financial
constraints are one of the important investment friction factors. Since Fazzari, Hubbard, and
Petersen (1988) emphasized the impact of financial constraints on corporate investment, many
literatures examined the relationship between the capital market imperfection and the corporate
investment. On the one hand, if the corporate risk is defined as the variance of the asset price
change rate and the future cash flow volatility, since it is extremely difficult for a financing-
constrained company to resort to external financing and it is highly dependent on its internal cash
flow, this means the investment of the financing-constrained company has a greater impact on cash
flow and is more sensitive to risk. On the other hand, as financial constraints will prevent
a company from financing all the investment projects it is interested in, a financing-constrained
company will be less sensitive to the profitable investment opportunities (Kaplan and Zingales
1997). In other words, when other factors are the same, given the level of investment expenditure,
a financing-constrained company has more profitable investment opportunities than the non-
financing-constrained one, which is consistent with the view that the marginal output rate of
investment opportunities diminishes. Therefore, when the investment level is the same, the finan-
cing-constrained company will see a greater risk change and the impact on the stock liquidity is
stronger. This article believes that the mechanism where the corporate investment increases the
company’s stock liquidity by reducing the corporate risk is more obvious in financing-constrained
companies. Based on this, the following hypothesis is made:
Hypothesis 2: In a highly financing-constrained company, corporate investment will reduce the corporate
market risk to a greater extent, and increase the stock liquidity, and the corporate market risk has a more
obvious mediating role in the corporate investment–stock liquidity relationship.
 MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY 5

1.3. Monetary Policy, Corporate Investment, and Stock Liquidity

Changes in the monetary policy can affect a company’s investment behavior. The traditional view is that
the monetary policy affects investment through two conversion mechanisms: currency (interest rate) and
credit (bank borrowing) (Bernanke and Blinder 1988). Specifically, monetary policy changes affect the
market interest rate and the amount of loans available to companies. For example, when the Central
Bank intends to slow down the economic growth, it will adopt a policy of reducing the reserves of the
banking system, which will correspondingly reduce the size of bank assets and liabilities (Song 2018). In
this way, the Central Bank can reduce the corporate investment by increasing the cost of capital and
reducing the amount of external funds available to the companies. The monetary policy changes affect
the amount of long-term loans available to companies through credit channels (Disyatat 2011).
According to Qi, Cao, and Zhao (2015), information asymmetry, principal–agent problems, and transac-
tion fees are the causes of corporate financial constraints. Due to the information asymmetry between
banks and companies and the weakening of the company’s balance sheet (for example, the company’s
ability to meet its current and future obligations is reduced), the tightening monetary policy will cause
banks to reorganize their loan portfolio structures and cut back on the company loans. When banks
implement the tightened monetary policy, the amount of corporate commercial papers will increase,
while the amount of bank loans will decrease, and after the interest rate factor is controlled, the reduction
in the loan supply will reduce the investment. Li and Zhang (2010) proposed according to the Q theory
that, investment friction will increase the investment–rate of return relationship. Therefore, during the
tightening (expansive) monetary policy period, if investment friction is enhanced (weakened), the given
investment expenditure will lower the company’s risk and enhance the company’s stock liquidity at
a higher (lower) level. Further, during the monetary policy tightening period, for the purpose of reducing
risks and increasing profits, banks will adjust the credit structure and prioritize scarce loans to companies
with sufficient mortgage or guarantee resources. Therefore, it can be reasonably expected that the
tightening monetary policy will increase the financing difficulty of financial-constrained companies
and the investment friction, and as a result, the investment of the financial-constrained companies has
a greater impact on the risk. Based on the above analysis, the following hypothesis is made:
Hypothesis 3: Under the background of tight monetary policy, the corporate investment will reduce the
corporate market risk to a greater extent and enhance the stock liquidity, and the corporate market risk will
have a more obvious mediating role in the corporate investment–stock liquidity relationship.

2. Research Design
2.1. Empirical Model Design
In order to prove whether the corporate investment affects the stock liquidity by changing the
corporate risk, this article constructs the following three models by referring to Wen and Ye (2014)
about the mediation effect test procedure:

AMHi ¼ β0 þ c  AbnIi þ β1  AMHi;t1 þ β2  Sizei;t1 þ β3  Pr ci;t1

(1)
þ β4  Turni;t1 þ β5  Voli;t1 þ β6  Reti;t1 þ β7  Cbi;t1 þ ε

Betai;t ¼ β0 þ a  AbnIi;t1 þ γ1 Betai;t1 þ γ2 Sizei;t1 þ γ3 Levi;t1 þ γ4 Voli;t1

(2)
γ5 Inshi;t1 þ γ6 Familyi;t1 þ γ7 Fini;t1 þ ε
6 H. ZHANG ET AL.

0
AMHi ¼ β0 þ c  AbnIi þ b  Betai þ β1  AMHi;t1 þ β2  Sizei;t1 þ β3  Pr ci;t1
(3)
þ β4  Turni;t1 þ β5  Voli;t1 þ β6  Reti;t1 þ β7  Cbi;t1 þ ε

Construction of models (1) and (3) are based on Kang, Wang, and Eom (2017), in which AMHi,t ,
AbnIi,t , Turni,t , Voli,t , and Reti,t represent Amihud (2002) illiquidity index, abnormal investment ratio,
stock turnover, stock return volatility, and stock return of firm i in year t, respectively, and Sizei,t ,
Prci,t , and Cbi,t represent log of firm total asset, stock price, and cash balance divided by total asset of
firm i at the end of year t, respectively. Construction of model (2) is based on Huang (2019), in which
Betai,t represent firm i’s systematic risk in year t, and Levi,t , Inshi,t , Familyi,t , and Fini,t represent
leverage, percentage of insiders shareholdings, dummy variable of family companies, and dummy
variable of financial sector companies, respectively.
In model (1), when the coefficient c is significant, if both a and b are significant and c′ is not
significant, it means that there is a complete mediating effect; when the coefficient c is significant, if
a, b, and c′ are all significant or at least one of a and b is not significant, and the Sobel test is passed,
it indicates there is a significant partial mediation effect.

2.2. Main Variable Definition

2.2.1. Independent Variable: Stock Liquidity
Multiple indicators are used in the market microstructure studies to measure the stock liquidity, but
Amihud’s (2002) illiquidity indicator, which reflects the impact of trading volume on the price, is
more widely accepted (Jiang, Ma, and Shi 2017). Based on this, this article uses the annual variation
of this indicator to measure stock liquidity. Amihud’s (2002) illiquidity indicator (AMHi;t ) is
calculated as follows:

 
1 X D Reti;t;d 
AMHi;t ¼   108 (4)
Di;t d¼1 Volumei;t;d

where Reti;t;d and Volumei;t;d are respectively the rate of return and the trading volume of stock i on
the dth trading day within May, June, and July1 of year t; and Di;t is the number of effective trading
days for stock i within this period. The individual stock risk is measured by the standard deviation of
the daily rate of return of stock i in year t, denoted as Voli;t . The greater the AMHi;t , the lesser the
liquid stock i will be during this period. The annual variation of AMHi;t is used to express the stock
liquidity (CAMHi;t ).

2.2.2. Mediating Variable: Corporate Market Risk

In a fully effective stock market, investors only focus on systemic risks and require a systemic risk
premium. Based on this, this article uses the Beta coefficient value of stock i in year t to measure the
systematic risk level of stock i in year t. The calculation method is as follows:

Reti;t;d ¼ β0 þ Betai;t  M Reti;t;d þ εi;t;d (5)

where Reti;t;d and MRett,d are respectively the return of stock i and the A-share market on the dth
trading day in year t. Based on the day return of stock i and the A-share market in year t, Betai,t is
estimated, and then the annual corporate market risk of stock i in year t can be measured.
 MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY 7

2.2.3. Dependent Variable: Abnormal Corporate Investment

By reference to the research of Kang, Wang, and Eom (2017), this article measures abnormal
corporate investment proxy for corporate investment, because we believe that abnormal corporate
investment is more informativeness. Abnormal investment (AbnIi;t ) is equal to the difference between
the non-current asset appreciation rate (Ii;t ) in the current year and the moving average of the
indicator for the first 3 years, which is calculated as follows ().

1
AbnIi;t ¼ Ii;t  ðIi;t1 þ Ii;t2 þ Ii;t3 Þ (6)
3

2.3. Sample
This article takes the A-share listed companies in China during 1999–2017 as sample, with ST and
*ST ones and those with missing data excluded. Finally, there are 31,022 annual firm observations
related with models (1) and (3), and 35,222 annual firm observations related with model (2). Both
financial and stock market data are from the CSMAR database.

3. Empirical Test
3.1. Descriptive Statistical Analysis and Correlation Analysis
Panel A of Table 1 shows the descriptive statistics and correlation coefficients of the main variables.
The skewnesses of Prci,t, Amhi,t, Tuvi,t, Reti,t, and Voli,t are all greater than 0, and for these variables,
the distance between the third quartile and the median is greater than that from the median to the
fourth quartile, indicating that these variables are in a right-skewed state. This means that the A-share
market in China has phenomena like extremely high stock prices, extremely low liquidity, extremely
high volatility, extremely high turnover, and extremely high rate of return, which is consistent with
the judgment on the extreme characteristics of the A-share market. The skewness of Betai,t is lower
than 0, and the distance between the third quartile and the median is less than that between the
median and the first quartile, which indicates that these variables are left-skewed. The skewnesses of
Abnii,t and Sizei,t are both greater than 0, but the distance between the third quartile and the median is
less than that between the median and the first quartile. This shows that there are a large number of
large-scale companies listed in the A-share market in China, with relatively high level of abnormal
investment. The mean and median of M2 are 0.14 and 0.137, respectively, the skewness is greater
than 0, and the distance between the third quartile and the median is less than that between the
median and the first quartile, which indicates the monetary policy is quite relaxed during most years
of the sample period.
Panel B of Table 1 shows that the correlation coefficient between Abnii,t−1 and Betai,t is −0.04
and significant at the level of 1%, and correlation coefficient between Abnii,t−1 and AMHi,t is
−0.01 and significant at 5% level . This preliminary result indicates that the company’s abnormal
investment expenditure in the previous period reduced the corporate market risk and enhanced the
company’s stock liquidity. The evidence obtained from the correlation analysis results prelimina-
rily proves the conclusion in this article. More relevant evidence will be obtained through
regression analysis.

3.2. Regression Analysis

Table 2 shows the Fama and Macbeth (1973) regression results of models (1), (2), and (3), from
which it can be seen whether the company’s abnormal investment affects the corporate stock liquidity
and whether the corporate market risk has a mediating effect.
8 H. ZHANG ET AL.

Table 1. Descriptive statistical and correlation analysis results of main variables.

Panel A: Descriptive statistics of main variables
Vars Mean SD Min Q1 Median Q3 Max Skewness

−0.068 0.380 −1.343 −0.225 −0.065 0.068 2.077 0.792

Amhi,t 15.12% 25.35% 0.29% 2.38% 5.33% 14.70% 174.96% 3.17
Betai,t 1.06 0.366 −21.64 0.913 1.078 1.213 15.894 −4.367
Sizei,t 14.82 1.26 10.40 13.96 14.82 15.63 21.50 0.25
Prci,t 2.33 0.66 0.10 1.91 2.32 2.75 6.02 0.18
Turni,t 0.148 0.111 0.010 0.057 0.123 0.214 0.555 0.999
Voli,t 2.90% 0.99% 0.37% 2.19% 2.68% 3.38% 6.92% 0.90
Reti,t 0.18 0.72 −0.85 −0.24 −0.05 0.32 15.49 3.18
M2t 0.14 0.06 0.05 0.11 0.137 0.148 0.323 1.99
Panel B: correlation coefficients of main variables
Amhi,t Abnii,t Betai,t Sizei,t Prci,t Turni,t Voli,t Reti,t
Amhi,t 1.00 −0.01** −0.04*** −0.30*** −0.17*** −0.19*** −0.04*** −0.11***
Abnii,t 1.00 −0.01** 0.01** −0.00 0.02*** 0.01 −0.00
Betai,t 1.00 0.04*** −0.03*** 0.15*** 0.04*** −0.06***
Sizei,t 1.00 0.06*** −0.15*** −0.02*** −0.04***
Prci,t 1.00 0.14*** 0.06*** 0.36***
Turni,t 1.00 0.12*** 0.37***
Voli,t 1.00 0.38***
Reti,t 1.00

Note: *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels in Panel B.

According to the regression results of model (1), the slope coefficient of Abnii,t−1 is −0.022 and is
significant at the level of 1%. This shows that the abnormal investment of Chinese A-share listed
companies can significantly enhance corporate stock liquidity after controlling other potential
determinants, which is consistent with the correlation analysis result.
According to the regression results of model (2), the slope coefficient of Abnii,t−1 is −0.016 and is
significant at the level of 1%. The adjusted R-squared of the model is increased from 33.83% in step
1 to 34.12% in step 2. This shows that the abnormal investment of Chinese A-share listed companies
can significantly reduce the corporate market risk, which is consistent with the correlation analysis
result.
According to the regression results of model (3) in step 2, the slope coefficient of Abnii,t−1 is
−0.018 and is significant at the level of 1%; the slope coefficient of Betai,t is −0.063 and is significant
at the level of 10%. This shows both Abnii,t−1 and Betai,t have significant impacts on Amhi,t. The
abnormal investment spending increases the stock liquidity. The higher the corporate market risk, the
lower the stock liquidity.
In general, the slope coefficients of Abnii,t−1 in model (1) and model (3) are −0.022 and −0.018,
respectively, and both are significant at the level of 1%; the slope coefficient of Abnii,t−1 in model (2)
is estimated to be −0.016 and significant at the level of 5%; and the estimated slope coefficient of
Betai,t in model (3) is negatively significant. This evidence fully demonstrates that companies’
abnormal investment significantly enhances the stock liquidity and lowers the corporate market
risk; the higher the corporate market risk, the lower the stock liquidity; and the corporate market
risk plays a partial mediating role in the corporate investment–stock liquidity relationship.
In summary, the evidence provided by the Fama and Macbeth (1973) regression results of models
(1), (2), and (3) proved the rationality of Hypothesis 1. The following analysis will be conducted to
determine whether the relationships between corporate investment, corporate market risk, and stock
liquidity in the different monetary policies are in line with Hypotheses 2 and 3.
 MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY 9

Table 2. Fama and Macbeth (1973) regression results of models (1), (2), and (3) in the whole
sample.
Model (2)

Model (1) Model (3) Step 1 Step 2

Constant 0.729*** 0.771*** Constant -0.182 -0.212

(3.70) (3.92) (-1.09) (-1.25)
Abnii,t-1 -0.022** -0.018*** Abnii,t-1 -0.016**
(-2.13) (-2.00) (-2.78)
Betai,t-1 -0.063* Betai,t-1 0.245*** 0.241***
(-1.84) (3.43) (3.29)
Amhi,t-1 0.668*** 0.661*** Sizei,t-1 0.024*** 0.026***
(6.72) (6.74) (3.88) (4.08)
Sizei,t-1 -0.031*** -0.031*** Levi,t-1 -0.058*** -0.058***
(-3.71) (-3.80) (-2.93) (-2.96)
Prci,t-1 0.001 0.000 Voli,t-1 16.879*** 16.954***
(0.96) (0.44) (4.83) (4.80)
Turni,t-1 0.016** 0.016** Inshi,t-1 0.481 0.482
(2.36) (2.39) (1.42) (1.43)
Voli,t-1 -2.02 -1.513 Familyi,t-1 -0.014 -0.012
(-1.58) (-1.19) (-1.36) (-1.20)
Reti,t-1 -0.042*** -0.042*** Fini,t-1 -0.006 -0.008
(-3.16) (-3.43) (-0.24) (-0.32)
Cbi,t-1 -0.084*** -0.068***
(-3.34) (-2.88)
Adj_R2 25.57% 26.01% Adj_R2 33.83% 34.12%

Note: *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively, and the figures in
brackets are the t-statistic.

4. Extended Studies under Different Corporate Financial Constraints and Different Monetary
Policies
4.1. Influence Mechanism of the Corporate Investment on the Stock Liquidity under
Different Financial Constraints
In China, the government favors the SOEs in resources allocation, and private enterprises face serious
discrimination in many aspects (Zhang et al. 2010). For example, in the process of credit resources
allocation, most of the bank loans flow to the SOEs, and only a few portions to the private
enterprises. Even if these private enterprises can obtain loans, they will also have to bear higher
loan mortgage rates, higher loan interest rates, and harsh repayment conditions (Zhang et al. 2010).
Kong, Liu, and Wang (2013) also believe that scarce resources will be preferentially allocated to
SOEs under the same conditions. Duan and Guo (2012), based on the proportion of long-term and
short-term borrowings in total debt, found that during the monetary policy tightening period,
companies with political connections are more likely to obtain bank credit support. Based on the
above analysis, this article uses the SOEs and non-state-owned enterprises (non-SOEs) to measure the
degree of financial constraints of these enterprises. Non-SOEs are identified as highly financing-
constrained samples, and SOEs as low financing-constrained ones. The regression model is estimated
with the two types of subsamples, from which evidence can be obtained as to whether the impact of
the corporate investment on the corporate stock liquidity and whether the mediating effect are
different between the two types of samples. The regression results are shown in Table 3.
10 H. ZHANG ET AL.

Table 3 shows the estimated results of the empirical model in the subsamples of SOEs and non-
SOEs. In the samples of SOEs, the slope coefficient of Abnii,t−1 in models (1) and (2) are −0.026
(insignificant) and −0.025 (significance level is 5%), respectively, and the slope coefficient of Betai,t
in model (3) is significantly non-zero, which fully indicates that the corporate abnormal investment
does not enhance the stock liquidity and reduces the corporate market risk, and that the corporate
market risk has no mediating effect.
In the samples of non-SOEs, the slope coefficient of Abnii,t−1 in models (1) and (2) are −0.022
(significance level is 5%) and −0.031(significance level is 5%), respectively, and the slope coefficient
of Betai,t and Abnii,t−1in model (3) are −0.087 and −0.016, both of which are significant at 10% level.
All these evidences indicate that the abnormal investment by non-SOEs enhances the stock liquidity
and corporate risk significantly, and the corporate market risk has a partial mediating effect on the
relationship between firm abnormal investment and stock liquidity.
In the samples of SOEs, the slope coefficients of Abnii,t−1 in models (1) and (3) are −0.026 and
−0.022, respectively, and both are insignificant; in the samples of non-SOEs, the slope coefficients of
Abnii,t−1 in models (1) and (3) are −0.022(significant at 5% level) and −0.016(significant at 10%
level), respectively. This shows that compared with that of the SOE samples, the abnormal investment
by non-SOEs can more significantly reduce the corporate market risk and enhance the stock liquidity,
and that the partial mediating effect of the corporate market risk is more obvious.
Based on the analysis above, the abnormal investment expenditures by non-SOEs significantly
enhance the stock liquidity, and reduce the corporate market risk more significantly. The corporate
market risk has a partial mediating effect on the corporate investment–stock liquidity relationship in
non-SOEs. This evidence supports Hypothesis 2.

4.2. Influence Mechanism of the Corporate Investment on the Stock Liquidity under
Different Monetary Policies
The monetary policy influence mechanism refers to the process in which the monetary policy
changes affect the real economic activities like production and employment, etc. through appro-
priate channels (Taylor 1995). The financial system in China is still dominated by credit, and the
conduction path of monetary policy mainly works by the adjustment of the credit size (Rao and
Jiang 2013). When the monetary policy fluctuates, the Central Bank adjusts the economic activities
mainly by adjusting the money supply of the banking system. Therefore, the monetary policy has
a great impact on the corporate credit financing (Li and Wang 2011). Given that M2 reflects the
investment and mid-market activity, this article uses M2 to measure the ease or tightness of the
monetary policy and its impact on corporate investment activities. The years in which M2 is lower
than the mean of its time series are identified as the monetary policy tightening periods, including
seven fiscal years 2001, 2002, and 2013–2017, and the remaining years are considered as monetary
policy easing periods. Then, in these two types of periods, models (1), (2), and (3) are estimated,
with the estimated results shown in Table 4. According to this, the evidence can be obtained on
whether the impact of the corporate investment on the stock liquidity and the mediating role of the
corporate market risk are different between the monetary policy tightening and easing periods.
In the monetary policy tightening period, the slope coefficient of Abnii,t−1 in model (2) and that of
Betai,t in model (3) are estimated to be −0.039 and −0.123, respectively, and both are significant at
the level of 1%. In models (1) and (3), the estimated slope coefficients of Abnii,t−1 are −0.033 and
−0.026, and both are significant at the levels of 1% and 10%, respectively. Together, this evidence
shows that during the tightening period of the monetary policy, corporate investment enhances the
stock liquidity and reduces the corporate market risk, and the corporate market risk has a relatively
obvious partial mediating effect in the corporate investment–stock liquidity relationship.
In the monetary policy easing period, the slope coefficient of Abnii,t−1 in model (2) and the slope
coefficient of Betai,t in model (3) are estimated to be 0.001 and 0.394, respectively, and are
Table 3. Fama and Macbeth (1973) regression results of models (1), (2), and (3) in SOEs and non-SOEs samples.
SOE subsample Non-SOE subsample

Model (1) Model (3) Model (2) Model (1) Model (3) Model (2)

Constant 0.526 0.549*** Constant -0.456** Constant 0.674*** 0.727*** Constant -0.212 -0.173
(0.810) (2.73) (-1.93) (2.98) (3.43) (-1.37) (-1.15)
Abnii,t-1 -0.026 -0.022 Abnii,t-1 0.025** Abnii,t-1 -0.022** -0.016* Abnii,t-1 0.031**
(-1.34) (-1.30) (2.07) (-2.04) (-1.84) (2.62)
Betai,t-1 -0.062** Betai,t-1 0.400*** Betai,t-1 -0.087* Betai,t-1 0.313*** 0.316***
(-2.51) (6.43) (-1.88) (3.71) (3.73)
Amhi,t-1 0.695*** 0.673*** Sizei,t-1 0.024*** Amhi,t-1 0.650*** 0.644*** Sizei,t-1 0.028*** 0.025***
(4.35) (4.46) (4.88) (6.46) (6.49) (3.84) (3.62)
Sizei,t-1 -0.022* -0.022** Levi,t-1 -0.077*** Sizei,t-1 -0.029*** -0.028*** Levi,t-1 -0.054** -0.053**
(-1.91) (-1.94) (-3.74) (-3.01) (-3.08) (-2.54) (-2.56)
Prci,t-1 0.001 0.001 Voli,t-1 19.723*** Prci,t-1 0.002* 0.002 Voli,t-1 14.492*** 14.568***
(0.39) (0.42) (4.42) (1.72) (1.54) (5.20) (5.20)
Turni,t-1 -0.002 -0.002 Inshi,t-1 0.517 Turni,t-1 0.017** 0.019** Inshi,t-1 0.426 0.253
(-0.31) (-0.33) (1.06) (2.31) (2.30) (0.60) (0.46)
Voli,t-1 1.448 2.469 Familyi,t-1 -0.011 Voli,t-1 -2.231* -1.483 Familyi,t- -0.018 -0.019*
(0.81) (0.92) (-1.22) (-1.64) (-1.19) 1 (-1.59) (-1.69)
Reti,t-1 -0.021*** -0.033** Fini,t-1 0.006 Reti,t-1 -0.050*** -0.046*** Fini,t-1 -0.007 -0.005
(-3.01) (-2.38) (0.28) (-3.08) (-3.25) (-0.28) (-0.22)
Cbi,t-1 -0.026 -0.028 Cbi,t-1 -0.118*** -0.100**
(-1.38) (-1.82) (-3.06) (-2.64)
Adj_R2 24.89 26.71 Adj_R2 9.70 Adj_R2 23.48 23.25 Adj_R2 9.88 9.97

Note: *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively, and the figures in brackets are the t-statistic.
MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY
11
 12

Table 4. Fama and Macbeth (1973) regression results of models (1), (2), and (3) in the tightening and expansionary monetary policy
periods.
Regression results in tightening monetary policy periods Regression results in expansionary monetary policy periods
H. ZHANG ET AL.

Model (1) Model (3) Model (2) Model (1) Model (3) Model (2)

Constant 0.818*** 0.914*** Constant -0.353** Constant 0.588* 0.546* Constant 0.020
(3.27) (3.54) (-2.08) (1.75) (1.79) (0.08)
Abnii,t-1 -0.033** -0.026* Abnii,t-1 -0.039*** Abnii,t-1 -0.006 -0.006 Abnii,t-1 0.001
(-2.01) (-1.83) (2.86) (-1.19) (-1.21) (0.23)
Betai,t-1 -0.123** Betai,t-1 0.300** Betai,t-1 0.031 Betai,t-1 0.394***
(-2.71) (2.35) (1.14) (9.54)
Amhi,t-1 0.753*** 0.739*** Sizei,t-1 0.031*** Amhi,t-1 0.533*** 0.540*** Sizei,t-1 0.011
(5.01) (4.92) (3.56) (6.05) (6.38) (1.40)
Sizei,t-1 -0.036*** -0.036*** Levi,t-1 -0.064** Sizei,t-1 -0.023* -0.023* Levi,t-1 -0.038
(-3.29) (-3.44) (-2.43) (-1.73) (-1.72) (-1.08)
Prci,t-1 0.001 0.000 Voli,t-1 15.073*** Prci,t-1 0.000 0.000 Voli,t-1 16.617***
(0.95) (0.21) (4.24) (0.18) (1.00) (2.86)
Turni,t-1 0.020** 0.000** Inshi,t-1 0.822 Turni,t-1 0.010 0.008 Inshi,t-1 -0.686
(2.00) (2.08) (1.10) (1.24) (1.21) (-1.01)
Voli,t-1 -1.721 -0.772 Familyi,t-1 -0.019 Voli,t-1 -2.489 -2.678 Familyi,t-1 -0.014
(-1.16) (-0.57) (-1.13) (-1.01) (-1.04) (-0.74)
Reti,t-1 -0.041*** -0.050*** Fini,t-1 -0.013 Reti,t-1 -0.044 -0.029* Fini,t-1 0.008
(-3.20) (-3.01) (-0.57) (-1.49) (-1.63) (0.14)
Cbi,t-1 -0.115*** -0.087** Cbi,t-1 -0.035* -0.038*
(-3.13) (-2.46) (-1.78) (-1.69)
Adj_R2 19.34 20.50 Adj_R2 7.96 Adj_R2 17.98 17.25 Adj_R2 5.22

Note: *, **, and *** denote statistical significance at the 10%, 5%, and 1% levels, respectively, and the figures in brackets are the t-statistic.
 MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY 13

insignificant and significant at 1% level, respectively; in models (1) and (3), the estimated slope
coefficients of Abnii,t−1 are both −0.006, and are both insignificant. Together, this evidence indicates
that during the monetary policy easing period, the corporate abnormal investment expenditure has no
significant impact on stock liquidity, but can improve firm systematic risk. This result does not
support our Hypothesis 2.
According to the regression results of the models in the two periods, it can be seen whether there is
any difference in the relationships between corporate investment, corporate market risk, and stock
liquidity under different monetary policies. In the monetary policy easing period, the estimated slope
coefficient of Abnii,t−1 in models (1) and (3) are both insignificant and does not change significantly,
indicating that the corporate abnormal investment has no significant impact on corporate stock
liquidity. During the monetary policy tightening period, the estimated slope coefficient of Abnii,t−1
in models (1) and (3) changes from −0.033 to −0.026, and the t value changes from −2.01 to −1.83.
During the monetary policy tightening and easing periods, the slope coefficient estimates of Abnii,t−1
in model (2) are −0.039 (significant) and −0.001 (insignificant). The above evidence shows that: in
the monetary policy tightening period, the corporate investment enhances stock liquidity more
significantly; in the two periods, the impacts of corporate investment on corporate market risk are
different; during the monetary policy tightening period, corporate market risk has a more obvious
partial mediating effect on the corporate investment–stock liquidity relationship.
In summary, the regression results under different monetary policy backgrounds indicate (1) in the
monetary policy tightening period, the corporate investment enhances the stock liquidity more
significantly; (2) the impacts of corporate investment on corporate market risk in the two types of
periods are quite different; (3) during the monetary policy tightening period, the partial mediating
effect of corporate market on the corporate investment–stock liquidity relationship is more evident.
This is basically consistent with Hypothesis 3.

5. Robustness Test
In order to ensure the reliability of the research results, the following changes are made in the
robustness test conducted in this article: (1) the actual value of AMHi,t minus the corporate time series
mean and the annual mean within the sample interval to measure the change in the stock liquidity,
which can eliminate the fixed effect and the time effect; (2) the annual growth rate of the sum of “net
fixed assets,” “construction in progress,” and “intangible assets” in the balance sheet is used to
measure the corporate investment; (3) the actual value of Betai,t minus the corporate cross-section
mean and the annual mean within the sample interval is used to measure the change in the corporate
market risk. The estimated results are not presented here to save space.
The evidence provided by the abovementioned robustness test proves once again that the invest-
ment by Chinese listed companies significantly does enhance the stock liquidity and reduce the
corporate market risk, and this effect is more pronounced in the tightening monetary policy period
and for those companies with high financial constraints. The corporate market risk has a partial
mediating effect on the investment–return relationship, which is more pronounced in the tightening
monetary policy period and for highly financial-constrained companies.

6. Conclusions and Implications

Stock liquidity is an important indicator of capital market efficiency and has great impacts on the
asset price, corporate governance, and resource allocation efficiency. With the expansionary monetary
policy gradually exiting and the increasingly tightening of liquidity, corporate stock liquidity has
attracted more and more attention in the theoretical and practical research fields. In this context,
clarifying the influencing factors to stock liquidity and its economic consequences has become an
urgent problem for researchers to solve. Most of the existing literatures focus on the impacts of stock
14 H. ZHANG ET AL.

liquidity on the asset price, i.e. the illiquidity premium problem. A few literatures studied the
heterogenous effects of exogenous impacts on stock liquidity. Recently, there are also literatures
discussing how micro-financial behavior such as corporate investment affects the stock liquidity.
However, the impact of a company’s micro-financial behavior on stock liquidity is closely related to
its own characteristics and the environment, that is, the impact of the company’s micro-behavior on
stock liquidity is context-dependent. The monetary policy is undoubtedly an important factor affect-
ing the company’s investment behavior, so the impact of the corporate investment on the stock
liquidity is closely related to the monetary policy. In addition, the research on stock liquidity and its
economic consequences mostly focuses on the developed stock markets, and few discuss the devel-
oping stock markets. Based on the above reasons, this article takes the A-share listed companies in
China during 2001–2017 as samples, and explores the impacts of corporate investment on stock
liquidity and its mechanism of action as well as its sensitivity to financial constraints and the
monetary policy.
The study finds that the investment by Chinese listed companies significantly enhances stock
liquidity and reduces stock market risk, and the corporate stock market risk plays a partial mediating
role in the corporate investment–stock liquidity relationship. Compared with the monetary policy
easing period, the company suffers from a greater extent of investment friction during the tightening
monetary policy period, which makes the corporate risk reduced and the liquidity increased more
significantly at the given investment level. Compared with SOEs, non-SOEs are subject to higher
levels of financial constraints. The investment spending of non-SOEs enhances the stock liquidity and
reduces the corporate market risk to a greater extent. In the tightening monetary policy period and
non-SOE samples, the mediating effect of the corporate market risk is more obvious on the corporate
investment–stock liquidity relationship.
Based on the above conclusions, the policy implications can be drawn as follows: First, when the
country is implementing the tight monetary policy, it is necessary to adopt supporting measures to
adjust the credit structure; otherwise, it may cause a greater negative impact on some companies with
good investment opportunities but subject to great difficulties in financing, which will in turn reduce
the overall allocation efficiency of credit resources. Second, for the capital market regulatory
authority, in the education of investors to improve their self-protection abilities, it is necessary to
emphasize the impacts of corporate investment on the corporate market risk and the corporate stock
price performance, so that investors can build more effective portfolios and better manage the
liquidity and market risks of portfolios. Third, for listed companies, in the assessment on the impacts
of corporate investment, it is necessary to consider the impacts of corporate investment on the
corporate market risk and the stock liquidity. This will help more comprehensively and objectively
assess the feasibility and effectiveness of investment projects and improve the company’s market
value management level.

Funding
This article is supported by National Natural Science Foundation of China [71602049], National
Natural Science Foundation of China [71503069], and National Social Science Foundation of China
[16BGL050].

Note
1. The reason why we use this period for calculating stock liquidity is that firms listed in Chinese stock market
disclose annual financial reports at the first 4 months of the year, and investors can react to news in the financial
reports in the following 3 months. Kang, Wang, and Eom (2017) calculate liquidity using similar period.
 MONETARY POLICY ADJUSTMENT, CORPORATE INVESTMENT AND STOCK LIQUIDITY 15

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