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Stock Liquidity and Cost of Private Debt

In: Empirical Research in Banking and Corporate Finance

Author

Listed:
  • Johan Maharjan
  • Suresh B. Mani
  • Zenu Sharma
  • An Yan

Abstract

The paper investigates whether stock liquidity of firms is valued by lending banks revealing that firms with higher liquidity in the capital market pay lower spreads for the loans they obtain. This relationship is causal as evidenced by using the decimalization of tick size as an exogenous shock-to-stock liquidity in a difference-in-differences setting. Reduction in financial constraint and improvement in corporate governance induced by higher stock liquidity are potential mechanisms through which liquidity impacts loan spreads. These higher liquidity firms also receive less stringent nonprice loan terms, for example, longer loan maturity and less required collateral.

Suggested Citation

  • Johan Maharjan & Suresh B. Mani & Zenu Sharma & An Yan, 2022. "Stock Liquidity and Cost of Private Debt," Advances in Financial Economics, in: Empirical Research in Banking and Corporate Finance, volume 21, pages 119-154, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:afeczz:s1569-373220220000021005
    DOI: 10.1108/S1569-373220220000021005
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    More about this item

    Keywords

    Stock liquidity; cost of bank loans; decimalization; exogenous shock; corporate external financing; agency problems; G12; G21;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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