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Bond liquidity, risk taking and corporate innovation

Author

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  • Ha D. Nguyen
  • Huong T.H. Dang

Abstract

Purpose - The purpose of this paper is to investigate how market liquidity condition of corporate bonds can affect firm investment policy, specifically its risk taking, via the disciplinary function of trading. Design/methodology/approach - The paper uses fixed-effects OLS and Poisson regression for the baseline specifications. It also employs the introduction of TRACE in 2002 as an exogenous shock to bond trading infrastructure in a difference-to-difference framework to address endogeneity concerns and establish causality. Findings - The paper documents a positive relationship between bond illiquidity and firms’ risk taking, specifically a one standard deviation increase in Amihud illiquidity measure is associated with nearly 20 percent increase in exploratory investments compared to CAPEX. The shift in risk taking in turn increases firms’ innovation output to some extent. Research limitations/implications - The findings have important implications on firm’s risk taking and growth. The paper identifies a new channel through which firm’s choice of risk can be influenced, namely, bondholder disciplining. The study also has implications about externalities of trading beyond liquidity cost for regulators in designing market microstructure. Originality/value - This is the first to study the disciplinary role of bond trading. Conventional wisdom holds that bondholders are passive creditors who do not engage in costly monitoring such as banks. The findings in this paper imply that this may not be the case.

Suggested Citation

  • Ha D. Nguyen & Huong T.H. Dang, 2019. "Bond liquidity, risk taking and corporate innovation," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 16(1), pages 101-119, September.
    • Handle: RePEc:eme:ijmfpp:ijmf-02-2019-0060
    DOI: 10.1108/IJMF-02-2019-0060
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    Citations

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    Cited by:

    1. Mirzaei, Abas & Wilkie, Dean C. & Siuki, Helen, 2022. "Woke brand activism authenticity or the lack of it," Journal of Business Research, Elsevier, vol. 139(C), pages 1-12.
    2. Ding Hu & Xianming Fang & Yuting Meng DiGiovanni, 2023. "Technological progress, financial constrains, and digital financial inclusion," Small Business Economics, Springer, vol. 61(4), pages 1693-1721, December.

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