Does Stock Liquidity Affect Corporate Debt Maturity Structure?

Abstract

We show an inverse relation between the use of short-term debt and stock market liquidity. This finding is robust to a battery of control variables, alternative measures of the key variables, and various identification strategies. A difference-in-difference (DiD) approach suggests that the relation between debt maturity structure and stock liquidity may be causal. The impact of stock liquidity on debt maturity is stronger in the presence of large institutional holdings and when borrowers are subject to greater refinancing risk. We also provide evidence that firms with liquid stock tend to issue longer-term bonds and enjoy lower bond yield spreads. Overall, our results support the view that the governance function of stock market liquidity reduces the necessity of debt market monitoring, which allows firms to shift toward longer-term debt to avoid the costs and risk of frequent refinancing.

Stock liquidity and corporate debt maturity structure: Evidences from Indian firms

“…More recently, Marks and Shang (2017) found a strong linkage between short‐term debt and stock liquidity. Additionally, they also found that the use of short‐term debt and stock liquidity are substitute monitoring mechanisms.…”

“…Additionally, entry and exit in high liquid stock is easier and quite cheaper when compared to other stocks (Admati & Pfleiderer, 2009; Edmans & Manso, 2011). By this way the exit of large shareholders (block holders) may generate price pressure and may thereby pose as a threat to the earnings of managers, specifically when their compensation is linked to stock performance making it necessary for the manager to act in the best interest of the shareholders and making it less necessary to discipline the manager with debt market monitoring (Marks & Shang, 2017). All of these evidences suggest that high stock liquidity is associated worth the utilization of lower short‐term debt.…”

“…The recent research in finance attempted to explore the linkage between stock liquidity and certain key aspects of corporate finance, for instance, stock liquidity, and firm value (Fang et al, 2009); stock liquidity and innovation (Fang et al, 2014); stock liquidity and corporate debt maturity (Marks & Shang, 2017); stock liquidity and price crash risk (Chang et al, 2016). This linkage is important because it explains how the stock market activity affect corporate finance decisions (Marks & Shang, 2017).…”

“…The recent research in finance attempted to explore the linkage between stock liquidity and certain key aspects of corporate finance, for instance, stock liquidity, and firm value (Fang et al, 2009); stock liquidity and innovation (Fang et al, 2014); stock liquidity and corporate debt maturity (Marks & Shang, 2017); stock liquidity and price crash risk (Chang et al, 2016). This linkage is important because it explains how the stock market activity affect corporate finance decisions (Marks & Shang, 2017). Specifically, these studies assert that stock liquidity plays a monitoring role through easier and cheaper exit of large shareholders (Admati & Pfleiderer, 2009; Edmans & Manso, 2011) and also enhances the information production and diffusion process (Holmström & Tirole, 1993).…”

“…Additionally, the evidences concerning the corporate debt maturity structure came from the developed countries that are characterized by well build banking and legal system and much advanced financial markets (Cappa et al, 2020; Grosse‐Rueschkamp et al, 2019; Marks & Shang, 2017). However, we cannot generalize these evidences to developing economies like India that is characterized by a bank dominated financial system with small, heterogeneous and marginal corporate bond markets as compared to those in developed economies (Altaf & Ahmad, 2019).…”