In The Wall Street Journal dated June 30, 1997, Suzanne McGee described why institutional investors, such as mutual fund managers, search for highly liquid stocks to invest in. If the stock is not liquid, these large investors will have to pay a higher price to buy in and receive a lower price if they sell out, simply because the quantities they deal in are large enough to affect share price. These concerns are heightened, according to McGee, because many large investors adopt a strategy of selling out at the first sign of trouble and buying back in at the first sign of recovery.
McGee points out that liquidity has a favourable effect on share price. For example, highly liquid stocks such as Coca- Cola are selling at 46 times earnings, whereas the Standard & Poor’s 500- stock index trades at 22 times earnings. In effect, McGee argues, the market pays a premium for liquidity.

a. Given its size and number of shares outstanding, how can a firm increase the liquidity of its shares? Consider depth, bid– ask spread, and synchronicity in your answer.
b. What are some of the costs to a firm of higher quality reporting?

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