Market Power And Stock Liquidity
Firms with market power have the ability to influence the prices of their products and services, suggesting that market power affects firm value by influencing cash flows. The authors contend that market power affects firm value through an additional channel, namely, by affecting a firm's cost of capital. Firms with greater market power have more liquid stocks and prior studies find that more liquid stocks have lower costs of capital. They study the link between a firm's product market power and its stock liquidity and find that market power, whether measured by market share or by excess profit margin, has a positive relation with stock liquidity.