Stock liquidity and default risk

Jonathan Brogaard, Dan Li, Ying Xia

Research output: Contribution to journalArticleResearchpeer-review

51 Citations (Scopus)

Abstract

This paper examines the impact of stock liquidity on firm bankruptcy risk. Using the Securities and Exchange Commission decimalization regulation as a shock to stock liquidity, we establish that enhanced liquidity decreases default risk. Stocks with the highest default risk experience the largest improvements. We find two mechanisms through which stock liquidity reduces firm default risk: improving stock price informational efficiency and facilitating corporate governance by blockholders. Of the two mechanisms, the informational efficiency channel has higher explanatory power than the corporate governance channel.
Original languageEnglish
Pages (from-to)486-502
Number of pages17
JournalJournal of Financial Economics
Volume124
Issue number3
DOIs
Publication statusPublished - Jun 2017

Keywords

  • Stock liquidity
  • Bankruptcy risk
  • EDF
  • Price efficiency
  • Governance

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