Capital Market Development and Financial System Architecture: Evidence from Stock Market Liquidity and Bank Syndicated Lending

60 Pages Posted: 28 Mar 2018 Last revised: 16 Feb 2019

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: February 14, 2019

Abstract

Whether banks and stock markets are substitutes or complements is much debated. We use an exogenous shock to capital market development, liquidity, to test whether stock markets complement or compete with banks. We find that greater stock price liquidity increases banks’ willingness to participate in syndication leading to more dispersed syndicated loan structures. The channel is through enhanced stock price informativeness that allows potential participant banks to learn more about the borrowing firm, reducing the adverse selection costs associated with syndication. Furthermore, we show that this feedback effect from markets to banks more generally improves corporate access to bank credit.

Keywords: liquidity, stock price informativeness, feedback effect, syndicated loans, information asymmetry, comparative financial systems

JEL Classification: G10, G14, G21, G32

Suggested Citation

Brogaard, Jonathan and Ngo, Phong T. H. and Xia, Ying, Capital Market Development and Financial System Architecture: Evidence from Stock Market Liquidity and Bank Syndicated Lending (February 14, 2019). 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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