Externality of Stock Liquidity to the Cost of Borrowing
51 Pages Posted: 16 Nov 2016
Date Written: November 2016
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 non-price loan terms, e.g., longer loan maturity and less required collateral.
Keywords: Stock liquidity; Cost of bank loans
JEL Classification: G12; G21
Suggested Citation: Suggested Citation