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Stock Liquidity And Corporate Bond Yield Spreads: Theory And Evidence

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  • Henry H. Huang
  • Hung-Yi Huang
  • Jeffrey J. Oxman

Abstract

type="main" xml:lang="en"> We examine the impact of individual stock liquidity on corporate bond yield spreads in the U.S. market. By extending the endogenous-default model to include stock liquidity in the calculation of bond value we show that a drop in stock liquidity will increase the firm's credit risk by increasing the firm's default boundary, leading to an increase of the credit spread. Our model is consistent with the sharp increase in credit risk premiums and the “yield spread spike” phenomenon in corporate bond markets during the financial crisis. We present empirical evidence supportive of our model.

Suggested Citation

  • Henry H. Huang & Hung-Yi Huang & Jeffrey J. Oxman, 2015. "Stock Liquidity And Corporate Bond Yield Spreads: Theory And Evidence," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 38(1), pages 59-91, March.
    • Handle: RePEc:bla:jfnres:v:38:y:2015:i:1:p:59-91
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    Cited by:

    1. Alex Petkevich & Andrew Prevost, 2018. "Managerial ability, information quality, and the design and pricing of corporate debt," Review of Quantitative Finance and Accounting, Springer, vol. 51(4), pages 1033-1069, November.
    2. JoonBum Leem & Ha Young Kim, 2020. "Action-specialized expert ensemble trading system with extended discrete action space using deep reinforcement learning," PLOS ONE, Public Library of Science, vol. 15(7), pages 1-39, July.
    3. Angeloantonio Russo & Massimo Mariani & Alessandra Caragnano, 2021. "Exploring the determinants of green bond issuance: Going beyond the long‐lasting debate on performance consequences," Business Strategy and the Environment, Wiley Blackwell, vol. 30(1), pages 38-59, January.
    4. Yutaka KURIHARA, 2017. "Monetary Policy and Stock/Foreign Exchange Market Liquidity: The Japanese Case," Journal of Economics Library, KSP Journals, vol. 4(1), pages 1-8, March.
    5. Wei Hao & Andrew Prevost & Udomsak Wongchoti, 2018. "Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market," Financial Management, Financial Management Association International, vol. 47(4), pages 865-909, December.
    6. Fu, Yumei & He, Feng & Li, Jintian & Zan, Bingyan, 2024. "Commonality in liquidity and corporate default risk - Evidence from China," Research in International Business and Finance, Elsevier, vol. 69(C).
    7. Verner, Robert & Tkáč, Michal, 2023. "On the predictability of bonds," Finance Research Letters, Elsevier, vol. 57(C).
    8. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    9. Manjit Kaur Sidhu & Parmjit Kaur, 2019. "Effect of corporate governance on stock market liquidity: empirical evidence from Indian companies," DECISION: Official Journal of the Indian Institute of Management Calcutta, Springer;Indian Institute of Management Calcutta, vol. 46(3), pages 197-218, September.
    10. Hu, Yi & Li, Yong & Zeng, Jianyu, 2019. "Stock liquidity and corporate cash holdings," Finance Research Letters, Elsevier, vol. 28(C), pages 416-422.

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