The Pricing of Liquidity Risk and Accounting Quality in Canada

Carl Brousseau


I investigate the pricing of liquidity risk and accounting quality in Canadian equity markets. I report evidence that security prices in Canada are significantly affected by liquidity risk, and that this association is significant throughout the year, with a spike in January. However, despite positive correlation between the accounting quality and liquidity factors, the accounting quality factor is not significantly different from zero except in January, and firm-specific estimates of exposure to the accounting quality factor (i.e. factor betas) have no predictive power for future returns. I conclude that while investments in accounting quality could possibly mitigate liquidity risk, accounting quality is unlikely to have a direct effect on the cost of capital of Canadian firms.

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Accounting and Finance Research
ISSN 1927-5986 (Print)   ISSN 1927-5994 (Online) Email:

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