Stock liquidity and default risk around the world

Business Resilience: Lessons from Government Responses to the Global COVID-19 Crisis

“…An average firm in our cross-country sample has a log of the asset book value of 8.036, a return on assets of 1.1%, holds 18.4% as cash in proportion to total assets, and 21.6% of its capital comes from debt financing. These statistics are comparable to other cross-country studies (e.g., Nadarajah et al, 2021).…”

“…We use the value of the natural log of total assets in the prior quarter (Size) to control for firm size. Besides that, firms with more cash holdings, earning higher profits, and less financially leveraged should have a lower probability of default, other things being equal (Opler et al, 1999;Almeida, Campello, & Weisbach, 2004;Nadarajah et al, 2021). We, thus, control for the cash-to-assets ratio (Cash), return on assets (Profitability), and debt-to-assets value (Leverage) in our baseline regression.…”

Does the threat of takeover affect default risk?

“…First, we extend the literature on the factors determining firm default risk. Prior studies show that firm characteristics such as stock liquidity (Brogaard et al., 2017; Nadarajah et al., 2021), innovation performance (Hsu et al., 2015) or incentive structure (Bennett et al., 2015) play a significant role in explaining default risk. We instead focus on the threat of takeovers, as measured by the takeover index, which by construction is largely exogenous to firm‐level decisions, and we show a significant negative impact of the threat of takeovers on default risk.…”

Environmental, social and governance disclosure and default risk

“…First, we contribute to the stream of research that explores the determinants of firms' default risk. This recent strand of literature has identified important determinants of default risk: for example, stock market liquidity (Brogaard et al, 2017; Nadarajah et al, 2020), incentive structure (Bennett et al, 2015), innovation performance (Hsu et al, 2015), debt maturity choice (Goyal & Wang, 2013), stock market return and volatility (Giesecke et al, 2011) and corporate governance characteristics including CEO compensation, board independence, gender diversity and ownership structure (see, e.g., Acrey et al, 2011; Ali, 2017; Ali et al, 2018, 2021; Chiang et al, 2015; Chiu & Wagner, 2012; Kabir et al, 2020; Miglani et al, 2015; Nadaraja et al, 2020; Schultz et al, 2017; Switzer & Wang, 2013; Vallascas & Hagendorff, 2013). We extend this literature by providing robust evidence regarding the role of aggregate ESG disclosure as a critical determinant of default risk for US nonfinancial firms.…”