Externality of Stock Liquidity to the Cost of Borrowing

51 Pages Posted: 16 Nov 2016

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Suresh Babu Mani

Rensselaer Polytechnic Institute (RPI)

An Yan

Fordham University - Gabelli School of Business

Date Written: November 2016

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 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

Francis, Bill and Hasan, Iftekhar and Mani, Suresh Babu and Yan, An, Externality of Stock Liquidity to the Cost of Borrowing (November 2016). BAFFI CAREFIN Centre Research Paper No. 2016-42, Available at SSRN: https://ssrn.com/abstract=2869820 or http://dx.doi.org/10.2139/ssrn.2869820

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan (Contact Author)

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Suresh Babu Mani

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

An Yan

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-7401 (Phone)
212-765-5573 (Fax)

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