Stock liquidity and investment efficiency: Evidence from the split-share structure reform in China.

Using China's split-share structure reform, we examined the effect of stock liquidity on investment efficiency. We found that enhanced stock liquidity results in more efficient investments and the effect is much more pronounced for under-investing firms than for over-investing firms. Additionally, we found that an increase in institutional ownership and price efficiency generated by a change in stock liquidity is positively associated with a reduction in under-investment. Thus, these findings suggest that under-investing firms with liquid stocks have more informed investors and face greater pressure to select an optimal investment level in the post-reform period. • We use a Chinese reform to examine the effect of liquidity on investment efficiency. • Enhanced liquidity leads to a reduction in under-investment, not over-investment. • The increase in institutional ownership and price efficiency drives the results. • However, the change in financing constraints is unable to account for the results. • Our findings further substantiate the real effects of financial markets. [ABSTRACT FROM AUTHOR]