Journal of Financial Economics Vol. 124 No. 3 2017

Stock liquidity and default risk

Jonathan Brogaard¹; Dan Li²; Ying Xia³

¹ University of Washington · ² University of Hong Kong · ³ Monash University

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.

DOI

10.1016/j.jfineco.2017.03.003

Volume

124

Issue

3

Pages

486-502

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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