Stock Liquidity and Cost of Private Debt

Johan Maharjan, Suresh B. Mani, Zenu Sharma and An Yan

A chapter in Empirical Research in Banking and Corporate Finance, 2022, vol. 21, pp 119-154 from Emerald Group Publishing Limited

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.

Keywords: Stock liquidity; cost of bank loans; decimalization; exogenous shock; corporate external financing; agency problems; G12; G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:afeczz:s1569-373220220000021005

DOI: 10.1108/S1569-373220220000021005

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