Today I read the paper titled “Liquidity as an Investment Style” by Roger Ibbotson, Zhiwu Chen, Daniel Y.-J. Kim, and Wendy Hu. The paper argues that liquidity should be considered as an investment style, similar to value/growth, or size (large cap/small cap).
The paper finds that buying stocks with less liquidity is more favorable than buying stocks with greater liquidity. Furthermore, numerous studies have shown that value stocks outperform growth stocks, but when adding in a liquidity factor, less liquid value stocks will outperform more liquid value stocks.