Liquidity Preference and Cross-Sectional Turnover Persistence

ABSTRACT: While numerous studies have examined the determinants of trading volume, we document new evidence that stocks with relatively high (low) turnover in a given year tend to maintain relatively high (low) turnover for the subsequent 20 years. This persistent preference for trading high turnover stocks suggests that investors have strong liquidity preference. To further show that investor trading preference on individual firms is largely formed very early on when their stocks became publicly traded, we use initial turnover and find that it dominates all the previously identified trading volume determinants in explaining future turnover. Our findings imply that Amihud and Mendelson‟s (1986) clientele effect is very persistent, i.e., short-term investors persistently trade liquidity stocks, while long-term investors persistently hold illiquid stocks. Also, Booth and Chua‟s (1996) liquidity-purchasing theory of IPO underpricng is relevant because initial turnover has long-lasting impacts on future liquidity