Abstract

This study discusses the association between stock liquidity and stock price crash risk in the context of a frontier market like the Pakistan Stock Exchange. This study uses a random effect model, fixed effect model, and logistic regression model to inspect the impact of stock liquidity on stock price crash risk. The study uses data from 70 firms for the years 2005- 2020 from KSE100 as the sample because of their high capitalization and considerable share on Pakistan Stock Exchange. The empirical results reveal that stock liquidity is positively related to firm level price crashes representing extreme price decreases in weekly returns. This study finds that high liquid stocks are more exposed to higher price crash risk than low liquidity stocks because high liquidity offers lower transaction costs enabling the investors to place huge buy and sell orders with much ease and comfort.