Does Expected Bond Liquidity Affect Financial Contracts

67 Pages Posted: 6 Dec 2016 Last revised: 7 Dec 2016

See all articles by Yaxuan Qi

Yaxuan Qi

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Yuan Wang

Concordia University, Quebec

Date Written: December 1, 2016

Abstract

This paper shows that bond market liquidity plays an important role in determining corporate debt contracts. We find that bonds with better expected market liquidity are issued with fewer restrictive covenants, longer maturities, and lower offering yield spreads. These results are robust to a quasi-natural experiment using the implementation of TRACE as an exogenous shock to bond market liquidity, and an instrumental variable regression controlling for the endogeneity of bond liquidity. Further investigation shows that the effect of liquidity is more pronounced in firms subject to more credit supply frictions, firms with poorer credit ratings and more rollover risk, and firms relying more on debt financing.

Keywords: bond liquidity, debt covenants, debt maturity, cost of debt

JEL Classification: G32, G14, G18

Suggested Citation

Qi, Yaxuan and Wang, Yuan, Does Expected Bond Liquidity Affect Financial Contracts (December 1, 2016). Available at SSRN: https://ssrn.com/abstract=2881063 or http://dx.doi.org/10.2139/ssrn.2881063

Yaxuan Qi (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Yuan Wang

Concordia University, Quebec ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1MB
Canada

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
118
Abstract Views
869
rank
253,139
PlumX Metrics