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Stock liquidity and default risk around the world

Sivathaasan Nadarajah, Huu Nhan Duong, Searat Ali, Benjamin Liu and Allen Huang

Journal of Financial Markets, 2021, vol. 55, issue C

Abstract: We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID)—an exogenous shock that increases liquidity. The effect of liquidity on default risk is more pronounced in countries with poorer investor protection and information environments. Further, this effect is attenuated (strengthened) for firms with greater information efficiency (governance monitoring). Overall, our findings highlight the important role of regulatory settings in shaping the impact of stock liquidity on default risk in international markets.

Keywords: Stock liquidity; Default risk; Investor protection; Information environment; Regulatory settings; Governance monitoring (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 G32 G33 G34 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:55:y:2021:i:c:s1386418120300665

DOI: 10.1016/j.finmar.2020.100597

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