Stock liquidity and default risk around the world

50 Pages Posted: 15 Jan 2017 Last revised: 21 Aug 2020

See all articles by Sivathaasan Nadarajah

Sivathaasan Nadarajah

Griffith University

Huu Nhan Duong

Monash University - Department of Banking and Finance; Financial Research Network (FIRN)

Searat Ali

University of Wollongong; University of Wollongong - School of Accounting, Economics & Finance

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics

Allen Huang

Griffith University - Department of Accounting, Finance and Economics

Date Written: August 14, 2020

Abstract

We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID)—an exogenous shock that increases liquidity. The effect of liquidity on default risk is more pronounced in countries with poorer investor protection and information environments. Further, this effect is attenuated (strengthened) for firms with greater information efficiency (governance monitoring). Overall, our findings highlight the important role of regulatory settings in shaping the impact of stock liquidity on default risk in international markets.

Keywords: Stock liquidity; Default risk; Investor protection; Information environment; Regulatory settings; Governance monitoring

JEL Classification: G12; G14; G15; G32; G33; G34

Suggested Citation

Nadarajah, Sivathaasan and Duong, Huu Nhan and Ali, Searat and Ali, Searat and Liu, Benjamin and Huang, Allen R., Stock liquidity and default risk around the world (August 14, 2020). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2897996

Sivathaasan Nadarajah (Contact Author)

Griffith University ( email )

170 Kessels Road
Nathan
Brisbane, QLD 4111
Australia

Huu Nhan Duong

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Searat Ali

University of Wollongong ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia
+61242392211 (Phone)

University of Wollongong - School of Accounting, Economics & Finance ( email )

Northfields Avenue
Wollongong, NSW 2522
Australia
+61242392211 (Phone)

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

Allen R. Huang

Griffith University - Department of Accounting, Finance and Economics ( email )

PMB 50
Gold Coast Queensland 9726
Australia

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