Free float and market liquidity around the world

• Stock liquidity increases with free float.
• The relationship is more significant in better governed countries.
• Stock liquidity risk decreases with free float.
• Free float can help mitigate liquidity dry-ups during financial crisis.

We investigate the relationship between free float and stock market liquidity using a sample covering 55 countries from 2003 to 2011. We find that stocks with higher free float have a higher level of liquidity. The relationship between free float and liquidity is evident in all regions regardless of the degree of economic development or geographic location and is more pronounced when the legal structure and corporate governance environment are strong. We present evidence that free float can mitigate liquidity dry-ups when there are large shocks to market liquidity, such as during the recent financial crisis. Finally, our study finds that higher free float is associated with lower liquidity risk. The paper suggests that liquidity can be a significant channel through which free float may affect stocks' expected returns.