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
Date Written: February 14, 2019
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
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