Stock Price Fragility and the Cost of Bank Loans

44 Pages Posted: 14 Apr 2020 Last revised: 6 Jul 2021

See all articles by Bill Francis

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Yinjie(Victor) Shen

Cleveland State University-Monte Ahuja College of Business

Pengfei Ye

Virginia Tech

Date Written: March 24, 2020

Abstract

This study examines whether the flow volatility experienced by institutional investors affects firms’ financing costs. Using Greenwood and Thesmar’s (2011) stock price fragility, a proxy for firm exposure to its institutional investors’ flow volatility, we find that firms with high stock price fragility pay higher bank loan costs than firms with low fragility. This effect on cost is partially mediated through board monitoring and most pronounced when lenders rely more on institutional shareholders to discipline corporate management, suggesting that unstable flows might weaken institutional investors’ monitoring effectiveness. The paper adds to the evidence that non-fundamental risks (institutional investors’ flow shocks) can have real impact on firms.

Keywords: Stock Price Fragility, Flow Volatility, Bank Loan Cost, Non-Fundamental Risk

JEL Classification: G12, G21, G32

Suggested Citation

Francis, Bill and Hasan, Iftekhar and Shen, Yinjie and Ye, Pengfei, Stock Price Fragility and the Cost of Bank Loans (March 24, 2020). Journal of Empirical Finance, Vol. 63, 2021, Available at SSRN: https://ssrn.com/abstract=3559895 or http://dx.doi.org/10.2139/ssrn.3559895

Bill Francis

Rensselaer Polytechnic Institute (RPI) - Lally School of Management & Technology ( email )

110 8th St
Troy, NY 12180
United States

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Yinjie Shen (Contact Author)

Cleveland State University-Monte Ahuja College of Business ( email )

1860 E 18th St #420
Cleveland, OH 44114
United States

Pengfei Ye

Virginia Tech

Blacksburg, VA 24061
United States

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