Debt, Information, and Illiquidity

Efraim Benmelech and Nittai Bergman

No 25054, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We analyze the empirical determinants of liquidity in debt markets in light of predictions stemming from debt-based information theories. We conduct a battery of tests confirming predictions of asymmetric information models of bond liquidity, including those that predict a``hockey-stick" relation between bond liquidity and underlying fundamental value. When debt is deep in the money, it becomes informationally insensitive and more liquid. In contrast, when firm value deteriorates towards the left tail, the value of debt becomes informationally sensitive and less liquid. We alleviate endogeneity concerns using exogenous variation in firm value that is plausibly not driven by bond liquidity. Our results shed new empirical light on the determination of liquidity in debt markets.

JEL-codes: E44 E51 G01 G12 G14 G32 (search for similar items in EconPapers)
Date: 2018-09
New Economics Papers: this item is included in nep-cfn and nep-mac
Note: AP CF EFG ME
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