Stock Prices in the Presence of Liquidity Crises: The Effect of Creditor Protection

19 Pages Posted: 13 Mar 2014

See all articles by Galina Hale

Galina Hale

Federal Reserve Bank of San Francisco

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Hui Tong

International Monetary Fund (IMF)

Date Written: April 2014

Abstract

We develop a model predicting two channels through which creditor protection affects stock prices: (1) the probability of a liquidity crisis leading to a binding investmentā€finance constraint falls with better creditor protection; (2) the stock prices under the investmentā€constrained regime increase with better creditor protection. We find evidence for both predictions using data on stock markets and creditor protection for 52 countries from 1980 to 2008. In particular, better creditor protection is correlated with lower stock market volatility and lower frequency of crises. Moreover, during crises, stock prices and investment fall more in countries with poor creditor protection.

Suggested Citation

Hale, Galina and Razin, Assaf and Tong, Hui, Stock Prices in the Presence of Liquidity Crises: The Effect of Creditor Protection (April 2014). Economica, Vol. 81, Issue 322, pp. 329-347, 2014. Available at SSRN: https://ssrn.com/abstract=2408251 or http://dx.doi.org/10.1111/ecca.12072

Galina Hale (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3131 (Phone)
415-974-2168 (Fax)

HOME PAGE: http://www.frbsf.org/economic-research/economists/galina-hale/

Assaf Razin

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 7303 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Hui Tong

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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