Debt, Information, and Illiquidity

54 Pages Posted: 17 Sep 2018

Date Written: September 2018


We analyze the empirical determinants of liquidity in debt markets in light of predictions stemming from debt-based information theories. We conduct a battery of tests confirming predictions of asymmetric information models of bond liquidity, including those that predict a``hockey-stick" relation between bond liquidity and underlying fundamental value. When debt is deep in the money, it becomes informationally insensitive and more liquid. In contrast, when firm value deteriorates towards the left tail, the value of debt becomes informationally sensitive and less liquid. We alleviate endogeneity concerns using exogenous variation in firm value that is plausibly not driven by bond liquidity. Our results shed new empirical light on the determination of liquidity in debt markets.

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Suggested Citation

Benmelech, Efraim and Bergman, Nittai, Debt, Information, and Illiquidity (September 2018). NBER Working Paper No. w25054. Available at SSRN:

Efraim Benmelech (Contact Author)

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nittai Bergman

Tel Aviv University

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