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This paper presents
empirical evidence that stock market liquidity is an important determinant
of the cost of raising external capital. Because the role of an investment
banking syndicate in a public security offering is analogous to that of a
block trader, investment banks should charge lower fees to firms with more
liquid securities. Using a large sample of seasoned equity offerings, we
find that, ceteris paribus, investment banks fees are significantly lower
for firms with more liquid stock. We estimate that the difference in the
investment banking fee for firms in the most liquid quintile versus the
least liquid quintile, controlling for other factors, is approximately 101
basis points, which represents about 21 percent of the average investment
banking fee in our sample. Our findings suggest that firms have an
incentive to promote the market liquidity of their equity.
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