Stock Market Liquidity and Loan Contracting

58 Pages Posted: 27 Jan 2022 Last revised: 17 Mar 2022

See all articles by Jonathan Brogaard

Jonathan Brogaard

University of Utah - David Eccles School of Business

Phong T. H. Ngo

Australian National University (ANU)

Ying Xia

Monash University - Monash Business School

Abstract

We examine how liquidity in the equity market affects bank lending costs. An exogenous decrease in liquidity during the SEC Tick Size Pilot Program raises corporate bank borrowing costs; an effect that reverses when the program ends. We find similar results in a broad panel of firms using both retail and institutional measures of liquidity. We identify three nonmutually exclusive channels driving this effect. Liquidity increases the price informativeness, enhances external monitoring by blockholders, and weakens the holdup problem in relationship banking. Finally, consistent with our channels we show that firms obtain larger loans with fewer covenant and collateral requirements.

Keywords: liquidity, syndicated loans, spillovers, stock price informativeness, blockholders, holdup problem

Suggested Citation

Brogaard, Jonathan and Ngo, Phong T. H. and Xia, Ying, Stock Market Liquidity and Loan Contracting. Available at SSRN: https://ssrn.com/abstract=4019582 or http://dx.doi.org/10.2139/ssrn.4019582

Jonathan Brogaard

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

HOME PAGE: http://www.jonathanbrogaard.com

Phong T. H. Ngo (Contact Author)

Australian National University (ANU) ( email )

RSFAS, College of Business and Economics
Australian National University
Canberra, Australian Capital Territory 0200
Australia
+61 2 6125 1079 (Phone)

HOME PAGE: http://cbe.anu.edu.au/people/rsfas/phong-ngo/

Ying Xia

Monash University - Monash Business School ( email )

900 Dandenong Road
Caulfield Campus
Melbourne, Victoria 3145
Australia

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