Stock market liquidity and the cost of issuing equity

We show that stock market liquidity is an important determinant of the cost of raising external capital. 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 vs. the least liquid quintile is about 101 basis points or 21% of the average investment banking fee in our sample. Our findings suggest that firms can reduce the cost of raising capital by improving the market liquidity of their stock.