Stock liquidity and default risk around the world

• Published in: Journal of financial markets (Amsterdam, Netherlands) Vol. 55; p. 100597
• Main Authors: Nadarajah, Sivathaasan, Duong, Huu Nhan, Ali, Searat, Liu, Benjamin, Huang, Allen
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.09.2021
• Subjects: Default risk; Governance monitoring; Information environment; Investor protection; Regulatory settings; Stock liquidity; Investor protection; G33; G32; Governance monitoring; Information environment; Regulatory settings; G12; G34; Stock liquidity; G15; G14; Default risk
• ISSN: 1386-4181; 1878-576X
• DOI: 10.1016/j.finmar.2020.100597

We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID)—an exogenous shock that increases liquidity. The effect of liquidity on default risk is more pronounced in countries with poorer investor protection and information environments. Further, this effect is attenuated (strengthened) for firms with greater information efficiency (governance monitoring). Overall, our findings highlight the important role of regulatory settings in shaping the impact of stock liquidity on default risk in international markets. •We document a negative effect of stock liquidity on default risk in international markets.•Default risk is lower following the introduction of the Directive on Markets in Financial Instruments (MiFID) .•The negative effect is more pronounced in countries with poorer investor protection and information environments.•The negative effect is attenuated (strengthened) for firms with greater information efficiency (governance monitoring).