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.
We examine the relevance of informal contracting mechanisms for corporate innovation. Using social capital to capture the social costs imposed on opportunistic behavior by management, we report evidence that firms headquartered in states with higher levels of social capital are associated with more innovation. This result is more pronounced when employees are more susceptible to holdup (e.g., firms with low labor union coverage, firms located in states with weak legal protections for employees, and firms surrounded by few external employment opportunities) and when employees face higher levels of information asymmetry. Our study highlights the importance of informal contracts for innovation.
Suppliers that are farther away from their customers make more relationship-specific investments (RSI). This association is more pronounced when it is less costly for the customer to switch to alternative suppliers and when the supplier operates in relatively opaque information environments. Using the introduction of new airline routes as an exogenous shock to the distance between supply chain partners, we show that the relation between supplier RSI and distance may be causal. We also provide evidence that suppliers with larger RSI are better able to maintain long-distance business relationships and are associated with higher firm value. These findings suggest an important dimension of supplier commitment: Suppliers use RSI as a signal of their willingness to fulfill on-going implicit claims.
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