Bond Liquidity and Investment

This paper examines the effects of bond liquidity on firms’ investments. We postulate that bond liquidity increases firms’ investment opportunities by reducing the cost of capital and improving access to financing. Using the variation in liquidity generated by several – both positive and negative – exogenous shocks, we find that firms respond to positive (negative) shocks by expanding (contracting) capital expenditures and acquisition activity. Further, by enhancing access to funding, bond liquidity facilitates acquisition financing and reduces the likelihood of investment delays. We also find a positive impact of bond liquidity on market valuations and profitability, suggesting that these investments are value-increasing.

Keywords: Liquidity, Investment, Mergers and Acquisitions

JEL Classification: G34, G32

Suggested Citation: Suggested Citation

Field, Laura Casares and Mkrtchyan, Anahit and Wang, Yuan, Bond Liquidity and Investment (July 8, 2022). Journal of Banking and Finance, Vol. 145, 2022, Available at SSRN: https://ssrn.com/abstract=3062841 or http://dx.doi.org/10.2139/ssrn.3062841