The dynamic effects of debtor bankruptcy on unsecured creditors' stock liquidity

Dinh Trung Nguyen, Thu Phuong Pham (), Ngoc Anh Tran and Ralf Zurbruegg

Journal of Financial Stability, 2024, vol. 74, issue C

Abstract: This paper explores the dynamic effects of counterparty risk on stock liquidity using data on unsecured creditors after a debtor has declared bankruptcy. Through matched pair fixed effect panel regressions, we find that liquidity for unsecured creditors reduces after such declarations but only in the short term. This is evidenced by increases in various spread measures and Kyle's (1985) lambda and decreases in the bid depth differentials between the stocks of the unsecured creditors and the matched firms. Additionally, we find the greater the credit exposure, the greater the decline in liquidity. In the long term, debtor bankruptcies appear to have no effect on spread measures. Rather, the market depth for unsecured creditor stocks improves.

Keywords: Liquidity; Unsecured creditors; Bankruptcies; Market depths; Counterparty risk (search for similar items in EconPapers)
JEL-codes: G10 G15 G18 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:74:y:2024:i:c:s1572308924001074

DOI: 10.1016/j.jfs.2024.101322

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