Stock Market Liquidity and Loan Contracting
58 Pages Posted: 27 Jan 2022 Last revised: 17 Mar 2022
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
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