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Stock Liquidity and Cost of Private Debt

Johan Maharjan ^a

Suresh B. Mani ^b

Zenu Sharma ^c

An Yan ^d

^aRensselaer Polytechnic Institute, USA

^bBank of America, USA

^cSt John's University, USA

^dFordham University, USA

Empirical Research in Banking and Corporate Finance

ISBN: 978-1-78973-398-3, eISBN: 978-1-78973-397-6

Publication date: 12 September 2022

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.

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Citation

Maharjan, J., Mani, S.B., Sharma, Z. and Yan, A. (2022), "Stock Liquidity and Cost of Private Debt", Ferris, S.P., John, K. and Makhija, A.K. (Ed.) Empirical Research in Banking and Corporate Finance (Advances in Financial Economics, Vol. 21), Emerald Publishing Limited, Leeds, pp. 119-154. https://doi.org/10.1108/S1569-373220220000021005

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Emerald Publishing Limited

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