Bond Liquidity and Investment

48 Pages Posted: 1 Nov 2017 Last revised: 15 May 2018

See all articles by Laura Casares Field

Laura Casares Field

University of Delaware - Alfred Lerner College of Business and Economics

Anahit Mkrtchyan

Northeastern University - D’Amore-McKim School of Business

Yuan Wang

Concordia University, Quebec

Date Written: May 15, 2018

Abstract

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 exogenous variation in liquidity generated by the introduction of TRACE, we find that bond liquidity enables firms to expand capital expenditures and acquisition activity. Furthermore, by enhancing access to funding, bond liquidity facilitates acquisition financing and reduces the likelihood of investment delays. The investments are value-increasing, as we find favorable market reactions to acquisitions and a positive impact of bond liquidity on market valuations and profitability.

Keywords: Liquidity, Investment, Mergers and Acquisitions

JEL Classification: G34, G32

Suggested Citation

Field, Laura Casares and Mkrtchyan, Anahit and Wang, Yuan, Bond Liquidity and Investment (May 15, 2018). Northeastern U. D’Amore-McKim School of Business Research Paper No. 3062841. Available at SSRN: https://ssrn.com/abstract=3062841 or http://dx.doi.org/10.2139/ssrn.3062841

Laura Casares Field (Contact Author)

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States
302-831-3810 (Phone)

Anahit Mkrtchyan

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
United States

Yuan Wang

Concordia University, Quebec ( email )

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

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