The Bright Side of Financial Fragility
64 Pages Posted:
Date Written: November 12, 2020
We highlight an important but overlooked characteristic of financial fragility: “fragile” stocks are more liquid because they are sensitive to non-fundamental liquidity shocks. This makes them less sensitive to corporate actions with price impact and therefore affects firms’ incentives to engage in those actions. We show that fragile firms have lower share repurchases but invest more, the effects stronger for financially constrained firms. We establish causality by relying on exogenous changes in fragility induced by mergers of asset managers with portfolio overlap in the stocks. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.
Keywords: Financial Fragility, Liquidity, Share Repurchases, Corporate Investment.
JEL Classification: G11, G12, G14, G15, G23.
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