This paper analyzes the importance of liquidity in determining security returns for firms listed on the Stockholm Stock Exchange between 1901 and 1919. Using a new and detailed firm-level data set with matching stock price and balance sheet information, we construct new stock return indices as well as firm-specific liquidity measures for our empirical analysis. Our main finding is that there was a substantial illiquidity effect on returns. Securities in the 25th percentile of the liquidity distribution earned, on average, a 0.59 percent higher monthly return than securities in the 75th percentile. This effect is comparable with estimates from modern stock markets and suggests that the liquidity premium is not solely a modern phenomenon but could be an inherent characteristic of financial markets.
Gernandt, Otto, Thomas Palm and Daniel Waldenström (2012),
"Liquidity Premia During the Industrial Breakthrough: Evidence from the Stockholm Stock Exchange, 1901–1919".
European Review of Economic History