Liquidity, Information Production, and Debt-Equity Choice

36 Pages Posted: 29 Jul 2019 Last revised: 19 Nov 2020

See all articles by William M. Cheung

William M. Cheung

University of Macau

Hyun Joong Im

Peking University - HSBC Business School

Thomas H. Noe

University of Oxford - Said Business School; University of Oxford - Balliol College; Bank of Finland; European Corporate Governance Institute

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

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Date Written: March 1, 2020

Abstract

We show that stock liquidity increases the propensity of firms to raise debt capital. The positive effect of liquidity on a debt issuance propensity is much stronger in firms with greater default risk. The effect of liquidity on the cost of debt capital is much larger than its effect on the cost of equity capital. These results are consistent with standard theoretical frameworks for financing under uncertainty and asymmetric information: by facilitating information production, stock liquidity reduces insider and market uncertainty about future firm cash flows, thereby lowering the default risk and thus the costs of debt financing.

Keywords: Stock liquidity, Debt issuance, Equity issuance, Capital structure

JEL Classification: G12, G32

Suggested Citation

Cheung, William Ming Yan and Im, Hyun Joong and Noe, Thomas H. and Zhang, Bohui, Liquidity, Information Production, and Debt-Equity Choice (March 1, 2020). Available at SSRN: https://ssrn.com/abstract=3426640 or http://dx.doi.org/10.2139/ssrn.3426640

William Ming Yan Cheung

University of Macau ( email )

Macau

Hyun Joong Im (Contact Author)

Peking University - HSBC Business School ( email )

University Town
Shenzhen, Guangdong 518055
China

Thomas H. Noe

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 3BJ
United Kingdom

University of Oxford - Balliol College ( email )

Broad St
Oxford, OX1 3BJ
United Kingdom

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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