Working Paper: NBER ID: w8969
Authors: Matthias Kahl; Jun Liu; Francis A. Longstaff
Abstract: Many firms have stockholders who face severe restrictions on their ability to sell their shares and diversify the risk of their personal wealth. We study the costs of these liquidity restrictions on stockholders using a continuous-time portfolio choice framework. These restrictions have major effects on the optimal investment and consumption strategies because of the need to hedge the illiquid stock position and smooth consumption in anticipation of the eventual lapse of the restrictions. These results provide a number of important insights about the effects of illiquidity in financial markets.
Keywords: liquidity restrictions; stockholder welfare; portfolio choice
JEL Codes: G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity restrictions (G33) | Welfare losses for stockholders (G32) |
| Illiquid stock holdings (G33) | Welfare losses for stockholders (G32) |
| Liquidity restrictions (G33) | Consumption levels (E21) |
| Liquidity restrictions (G33) | Investment strategies (G11) |
| Ownership of restricted shares (G34) | Optimal portfolio strategy (G11) |
| Risk aversion (D81) | Costs of liquidity restrictions (G33) |
| Liquidity restrictions (G33) | Entrepreneurial ventures (M13) |