Bond Liquidity, Risk Taking and Corporate Innovation

32 Pages Posted: 14 Feb 2019

See all articles by Huong Dang

Huong Dang

Foreign Trade University (FTU)

Ha Diep-Nguyen

Purdue University, Krannert School of Management

Date Written: January 25, 2019

Abstract

This paper investigates how market liquidity condition of corporate bonds can affect firm investment policy, specifically its risk taking. We hypothesize that bond liquidity can affect firm's risk taking via the disciplinary function of trading. Indeed, we document a positive relationship between bond illiquidity and firms' risk taking, specifically a one standard deviation in Amihud illiquidity measure is associated with nearly 20% increase in investment ratio. Using introduction of TRACE in 2002 as an exogenous shock to bond trading infrastructure, our findings suggest that the relationship is causal. Finally, we document that the shift in risk taking increase the volume but not necessarily the quality of innovation output. Our empirical results have important implications for firms risk policy and growth as well as for designing of market microstructure.

Keywords: Bond Liquidity, Peer Effects, Risk Taking, Innovation

JEL Classification: G23, G31, G32

Suggested Citation

Dang, Huong and Nguyen, Ha, Bond Liquidity, Risk Taking and Corporate Innovation (January 25, 2019). Available at SSRN: https://ssrn.com/abstract=3328968 or http://dx.doi.org/10.2139/ssrn.3328968

Huong Dang

Foreign Trade University (FTU) ( email )

91 Chua Lang St
Dong Da District
Hanoi, Hochiminh city 10000
Vietnam

Ha Nguyen (Contact Author)

Purdue University, Krannert School of Management ( email )

403 W State St
West Lafayette, IN 47907
United States

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