Stock Liquidity and Default Risk

Posted: 23 Aug 2015 Last revised: 12 Feb 2017

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Dan Li

The University of Hong Kong - School of Economics and Finance

Ying Xia

Monash University - Monash Business School

Date Written: February 10, 2017

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

JEL Classification: G12; G14; G33; G34

Suggested Citation

Brogaard, Jonathan and Li, Dan and Xia, Ying, Stock Liquidity and Default Risk (February 10, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2649084 or http://dx.doi.org/10.2139/ssrn.2649084

Jonathan Brogaard (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Dan Li

The University of Hong Kong - School of Economics and Finance ( email )

Shenzhen
China

Ying Xia

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield Campus
Melbourne, Victoria 3145
Australia

Register to save articles to
your library

Register

Paper statistics

Abstract Views
3,073
PlumX Metrics