Capital Market Development and Financial System Architecture: Evidence from Stock Market Liquidity and Bank Syndicated Lending
60 Pages Posted: 28 Mar 2018 Last revised: 4 Nov 2019
Date Written: November 2, 2019
Why banks and stock markets co-exist is much debated. We test whether stock market developments complement or substitute bank financing activity. We find that stock market improvements increase the amount of credit banks make available to firms. Banks also become more willing to participate in syndicated lending. We show the channel of the complementarity is through improved stock price informativeness, which allows banks to learn more about the borrowing firm, reducing the adverse selection costs associated with syndication.
Keywords: comparative financial systems, liquidity, stock price informativeness, feedback effect, syndicated loans, information asymmetry
JEL Classification: G10, G14, G21, G32
Suggested Citation: Suggested Citation