Stock liquidity and default risk

Jonathan Brogaard, Dan Li and Ying Xia

Journal of Financial Economics, 2017, vol. 124, issue 3, 486-502

Abstract: This paper examines the impact of stock liquidity on firm bankruptcy risk. Using the Securities and Exchange Commission decimalization regulation as a shock to stock liquidity, we establish that enhanced liquidity decreases default risk. Stocks with the highest default risk experience the largest improvements. We find two mechanisms through which stock liquidity reduces firm default risk: improving stock price informational efficiency and facilitating corporate governance by blockholders. Of the two mechanisms, the informational efficiency channel has higher explanatory power than the corporate governance channel.

Keywords: Stock liquidity; Bankruptcy risk; EDF; Price efficiency; Governance (search for similar items in EconPapers)
JEL-codes: G12 G14 G33 G34 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (143)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:124:y:2017:i:3:p:486-502

DOI: 10.1016/j.jfineco.2017.03.003

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