Does Stock Market Illiquidity Influence the Cost of Borrowing? Evidence from Syndicated Loans

57 Pages Posted: 19 Dec 2016

See all articles by Jiayuan Chen

Jiayuan Chen

University College Dublin (UCD)

Di Gong

University of International Business and Economics (UIBE) - School of Banking and Finance

Cal B. Muckley

University College Dublin

Date Written: October 12, 2016

Abstract

We show that firms with illiquid stock pay higher syndicated loan spreads. This result is invariant to multiple measurements of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and year fixed effects. This result also holds using matched difference-in-differences at an exogenous reduction in the minimum tick size of major United States exchanges and using a two-stage least squares estimator. Stock illiquidity is, moreover, shown to diminish the benefit to the loan recipient of a lending relationship. A rationale for these findings is that stock market illiquidity impairs the bargaining power of corporate borrowers, in the loan spread negotiating procedure, as it raises the cost of alternatively issuing equity. Our findings, thus, indicate that relative bargaining power plays a systematic role in determining syndicated loan spreads.

Keywords: Market Illiquidity, Costs of Borrowing, Bargaining Power, Information Opacity, Lending Relationship

JEL Classification: G14, G32

Suggested Citation

Chen, Jiayuan and Gong, Di and Muckley, Cal B., Does Stock Market Illiquidity Influence the Cost of Borrowing? Evidence from Syndicated Loans (October 12, 2016). Available at SSRN: https://ssrn.com/abstract=2887049 or http://dx.doi.org/10.2139/ssrn.2887049

Jiayuan Chen

University College Dublin (UCD) ( email )

Belfield
Belfield, Dublin 4 4
Ireland

Di Gong

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Cal B. Muckley (Contact Author)

University College Dublin ( email )

Blackrock, Co. Dublin
Ireland
+353-1-716-8091 (Phone)

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