Liquidity and Default Risk Around the World

Posted: 15 Jan 2017

See all articles by Sivathaasan Nadarajah

Sivathaasan Nadarajah

Griffith University

Searat Ali

affiliation not provided to SSRN

Benjamin Liu

Griffith University - Department of Accounting, Finance and Economics

Allen Huang

Griffith University - Department of Accounting, Finance and Economics

Date Written: January 12, 2017

Abstract

We extend the empirical literature on the liquidity–default relation, which has mostly relied on US data (e.g., Brogaard et al., 2016), and we are the first to examine whether the effect of liquidity on default exists across 48 countries, particularly focusing on institutional environment. Firms with more liquid stocks are expected to have a lower default because in such firms the cost of raising external funds is lower, resulting in adequate cash flow to meet debt service costs and principal payments. Consistent with this notion, using a large panel of non-financial firms in 48 countries over the period 2004–2015, our findings demonstrate an inverse relationship between liquidity and default across countries. Notably, we observe the moderating role of various country-specific variables (e.g., shareholder rights, creditor rights, governance quality, legal origins) in liquidity–default linkage. In addition, we emprically explore the underlyding mechanims (e.g., cost of equity, analyst’s coverage and firm value) through which liquidity determines default risk. These findings have profound implications for the stakeholders of the firm including investors and regulators.

Keywords: liquidity, default, non-financial firms, global markets

JEL Classification: G12, G33, G34

Suggested Citation

Nadarajah, Sivathaasan and Ali, Searat and Liu, Benjamin and Huang, Allen R., Liquidity and Default Risk Around the World (January 12, 2017). Available at SSRN: https://ssrn.com/abstract=2897996

Sivathaasan Nadarajah (Contact Author)

Griffith University ( email )

170 Kessels Road
Nathan
Brisbane, QLD 4111
Australia

Searat Ali

affiliation not provided to SSRN

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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