Spillovers from equity to banking markets: Evidence from stock liquidity and the cost of bank loans

49 Pages Posted: 28 Mar 2018 Last revised: 13 Oct 2020

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Phong T. H. Ngo

Australian National University (ANU)

Ying Xia

Monash University - Monash Business School

Date Written: October 12, 2020

Abstract

We use the SEC Tick Size Pilot Program to show that stock liquidity reduces the cost of bank loans. Treated firms experience a 52 basis point increase in the cost of borrowing during the Tick Size Pilot Program; an effect that reverses when the program ends. We find similar results in a broad panel of firms using both retail and institutional measures of liquidity. We identify three non-mutually exclusive channels driving this effect. Liquidity increases the informativeness of prices, enhances external monitoring of the borrower by blockholders, and weakens the holdup problem in relationship banking. Finally, we show that firms respond to lower borrowing costs by using more bank credit.

Keywords: liquidity, syndicated loans, spillovers, stock price informativeness, blockholders, holdup problem

JEL Classification: G10, G14, G21, G32

Suggested Citation

Brogaard, Jonathan and Ngo, Phong T. H. and Xia, Ying, Spillovers from equity to banking markets: Evidence from stock liquidity and the cost of bank loans (October 12, 2020). Available at SSRN: https://ssrn.com/abstract=3150149 or http://dx.doi.org/10.2139/ssrn.3150149

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Phong T. H. Ngo (Contact Author)

Australian National University (ANU) ( email )

RSFAS, College of Business and Economics
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 2 6125 1079 (Phone)

HOME PAGE: http://cbe.anu.edu.au/people/rsfas/phong-ngo/

Ying Xia

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield Campus
Melbourne, Victoria 3145
Australia

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