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.
Well‐known anomalies and stable patterns in equity returns are widely employed to guide stock selection. The use of overlapping multifactor models built on these patterns induces correlated trade across investors. A stock with a strong signal from a parsimonious multifactor stock selection model exhibits changes in trade activity, net order imbalances, lower volatility, lower liquidity level, and changes in liquidity comovement consistent with correlated trade. These results illustrate that correlated trading among investors can affect the liquidity and risk of the securities they trade, and imply that measures of portfolio liquidity risk that ignore these changes can understate risk.
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