Stock price fragility and the cost of bank loans

This study examines whether the flow volatility experienced by institutional investors affects firms’ financing costs. Using Greenwood and Thesmar’s (2011) stock price fragility measure, we find that there is a positive relationship between fragility and firms’ costs of bank loans. This effect is most pronounced when lenders rely more on institutional shareholders to discipline corporate management, or when loans are made by relationship lenders, suggesting that unstable flows could weaken institutional investors’ monitoring effectiveness and strengthen relationship banks’ bargaining power.