Liquidity and Credit Risk

We develop a structural bond valuation model to simultaneously capture liquidity and credit risk. Our model implies that renegotiation in financial distress is influenced by the illiquidity of the market for distressed debt. As default becomes more likely, the components of bond yield spreads attributable to illiquidity increase. When we consider finite maturity debt, we find decreasing and convex term structures of liquidity spreads. Using bond price data spanning 15 years, we find evidence of a positive correlation between the illiquidity and default components of yield spreads as well as support for downward‐sloping term structures of liquidity spreads.     

Credit Ratings and Capital Structure

This paper examines to what extent credit ratings directly affect capital structure decisions. The paper outlines discrete costs (benefits) associated with firm credit rating level differences and tests whether concerns for these costs (benefits) directly affect debt and equity financing decisions. Firms near a credit rating upgrade or downgrade issue less debt relative to equity than firms not near a change in rating. This behavior is consistent with discrete costs (benefits) of rating changes but is not explained by traditional capital structure theories. The results persist within previous empirical tests of the pecking order and tradeoff capital structure theories.     

The Credit Ratings Game

The collapse of AAA‐rated structured finance products in 2007 to 2008 has brought renewed attention to conflicts of interest in credit rating agencies (CRAs). We model competition among CRAs with three sources of conflicts: (1) CRAs conflict of understating risk to attract business, (2) issuers' ability to purchase only the most favorable ratings, and (3) the trusting nature of some investor clienteles. These conflicts create two distortions. First, competition can reduce efficiency, as it facilitates ratings shopping. Second, ratings are more likely to be inflated during booms and when investors are more trusting. We also discuss efficiency‐enhancing regulatory interventions.     

Liquidity and Stock Exchange Listing

This study examines the pattern of stock price behavior for a sample of 71 firms that moved from NASDAQ and NASDAQ/NMS to the American Stock Exchange (AMEX) between 1982 and 1987. The study tests the liquidity gains hypothesis, which states that investors expect liquidity gains for the less liquid over-the-counter stocks but not for their more liquid counterparts after their listing on the AMEX. The results support the hypothesis by showing a significant difference between the two groups of stocks on the day the AMEX announced approval of the listing. Thus, companies with low liquidity are the largest beneficiaries of listing. The evidence provides little support for the anomalous negative pattern of returns during the post-listing period reported in previous studies.     

Stock Market Declines and Liquidity

Consistent with recent theoretical models where binding capital constraints lead to sudden liquidity dry-ups, we find that negative market returns decrease stock liquidity, especially during times of tightness in the funding market. The asymmetric effect of changes in aggregate asset values on liquidity and commonality in liquidity cannot be fully explained by changes in demand for liquidity or volatility effects. We document interindustry spillover effects in liquidity, which are likely to arise from capital constraints in the market making sector. We also find economically significant returns to supplying liquidity following periods of large drops in market valuations.     

Credit Ratings as Coordination Mechanisms

In this article, we provide a novel rationale for credit ratings.The rationale that we propose is that credit ratings serve asa coordinating mechanism in situations where multiple equilibriacan obtain. We show that credit ratings provide a "focal point"for firms and their investors, and explore the vital, but previouslyoverlooked implicit contractual relationship between a creditrating agency (CRA) and a firm through its credit watch procedures.Credit ratings can help fix the desired equilibrium and as suchplay an economically meaningful role. Our model provides severalempirical predictions and insights regarding the expected priceimpact of rating changes.     

REIT Stock Splits and Liquidity Changes

This study examines the motive of stock splits made by REITs. We find that REIT liquidity increases after the split announcement. However, the increase in liquidity is limited to days around the split announcement. After the ex-date, the liquidity tends to revert back to the pre-split level. We find that the positive market reaction around the announcement date is positively related to the change in short-term liquidity but not to the change in long-term liquidity. The announcement effect is also not correlated with future changes in operating performance. Overall, our results suggest that REITs split their share to attract investors’ attention rather than to signal or to improve trading liquidity in the long run.     

Alternative Liquidity Measures and Stock Returns

Abstract. This article compares the properties of several common liquidity measures including the bid-ask spread, the liquidity ratio and firm size. We also use the proportional hazard model to develop a new measure, the relative odds ratio, based on the volume necessary to move prices by a predetermined amount. Although each measure displays a liquidity premium, a composite measure better explaims expected returns, suggesting that liquidity is a multidimensional phenomenon.     

Executive Network Centrality and Stock Liquidity

We examine the relationship between stock market liquidity and the network centrality of firm executives. We find that firms whose executive officers are more central in the network of executives have narrower bid‐ask spreads. We use an exogenous network centrality shock of executive turnover and report that liquidity improves after firms hire executives with greater centrality. We present evidence that improved liquidity is attributable to efficient information flows around executives in more advantageous network positions.     

Internationalization and Stock Market Liquidity*

What is the impact of internationalization (firms raising capital and trading in international markets) on the liquidity of the remaining firms in domestic markets? To address this question, we assemble a panel database of nearly 2,900 firms from 45 emerging economies over the period 1989–2000, constructed from annual and daily data. First, we find evidence of migration. The domestic trading of firms that cross-list or issue depositary receipts in foreign public exchanges tends to decrease, while a significant proportion of their trading activity concentrates in international markets. Second, this migration is negatively related to the liquidity of the remaining firms in their home market through two separate channels. There are liquidity spillovers within markets: Aggregate domestic trading activity is positively associated with the liquidity of individual firms in the same market. Moreover, the proportion of trading abroad is negatively related to the liquidity of firms in the domestic market. * The paper was revised while Schmukler was visiting the IMF Research Department. We thank Tatiana Didier and Juan Carlos Gozzi Valdez for truly outstanding research assistance. We are grateful to Franklin Allen and Marco Pagano for very useful and detailed comments. We also received very helpful suggestions from Gordon Alexander, Luca Benzoni, Stijn Claessens, Peter Henry, Eduardo Loyo, Ugo Panizza, Valery Polknichenko, Helene Rey, Michael Schill, Frank Warnock, two anonymous referees, seminar participants at Dartmouth College, the Econometric Society Meetings (Chile), the NBER IASE Meeting in PUC-Rio (Brazil), the University of Minnesota, the University of Virginia (Darden School of Business), the University of Zurich, and the World Bank. For help with the data, we thank particularly Florencia Moizeszowicz and also Pamela Dottin, Monica Erpen, Dori Flanagan, Marina Halac, Angela Marshall, Konstantinos Tzioumis, Richard Webster-Smith, and Cheryl Workman. Levine is grateful for generous financial support from the BSI Gamma Foundation. Schmukler thanks the World Bank Latin American Regional Studies Program and Research Support Budget for ample financial support. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the views of the World Bank.     

股票流动性与企业资本配置效率

本文从市场微观结构的角度,研究我国上市公司股票流动性和资本配置效率之间的经验关系,发现股票流动性有助于降低企业非效率投资,这种负相关关系具体表现为流动性有助于缓解投资不足并抑制过度投资;进一步研究表明,股票流动性主要通过降低代理成本和提升股价信息含量等机制改善资本配置效率。本文研究结论表明,只有继续优化股权结构与公司治理、规范信息披露制度并加强内幕交易打击力度,才能增强市场流动性并提高资本配置效率。     

Are Unsolicited Credit Ratings Lower? International Evidence From Bank Ratings

Abstract:   In recent years credit rating agencies have started rating firms who have not asked for a rating. Recipients of unsolicited ratings argue that the assigned ratings are too low and reflect a lack of comprehensive knowledge of the rated firms. We set out to examine these claims using a comprehensive and international sample of 1,060 bank ratings. Our results show that there is a significant difference in the distributions of ratings, and the shadow group has lower ratings. The results also indicate that banks that received shadow ratings are smaller and have weaker financial profiles than banks that have other ratings. This explains, in part, the lower ratings. In addition, we develop a model to explain bank ratings. The two‐step treatment effects model shows that bank size, profitability, asset quality, liquidity, and sovereign credit risk are important factors in determining bank ratings.     

Liquidity and Autocorrelations in Individual Stock Returns

This paper documents a strong relationship between short‐run reversals and stock illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in high turnover, low liquidity stocks, as the price pressures caused by non‐informational demands for immediacy are accommodated. However, the contrarian trading strategy profits are smaller than the likely transactions costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short‐term reversals is not so egregious after all.     

Stock Market Liquidity and the Business Cycle

In the recent financial crisis we saw liquidity in the stock market drying up as a precursor to the crisis in the real economy. We show that such effects are not new; in fact, we find a strong relation between stock market liquidity and the business cycle. We also show that investors' portfolio compositions change with the business cycle and that investor participation is related to market liquidity. This suggests that systematic liquidity variation is related to a “flight to quality” during economic downturns. Overall, our results provide a new explanation for the observed commonality in liquidity.     

公司特征、股权结构与股票流动性

股票流动性是金融市场微观结构的核心议题,其影响因素问题受到了人们的广泛关注。然而,以往的研究存在两个方面的重要缺陷:一是多数研究仅关注了股权结构对股票流动性的影响,而忽略了公司特征因素的作用;二是以往股权结构视角的研究由于存在研究设计上的问题,使得实证结论的可靠性不高。本文使用2003-2009年沪深两市仅发行了A股的上市公司为样本,采用高频交易数据构造买卖价差以衡量股票流动性,考察了公司特征、股权结构与股票流动性之间的关系,以及股权分置改革对这一关系的影响,得到了与以往研究不同的实证结论。针对这些结论,本文给出了符合我国制度背景的理论阐释。     

Liquidity,Skewness and Stock Returns: Evidence from Chinese Stock Market

In this paper, a capital asset pricing model (CAPM) incorporating liquidity and skewness factors is proposed and tested by using the Chinese stock market data. The empirical results indicate that, under various market conditions, the liquidity-adjusted three-moment CAPM provides a better fit to the realized returns of various stock portfolios. Overall, this research reveals that illiquidity cost, liquidity risk and as well as skewness have important impacts on asset pricing in the Chinese stock market.     

Default, Currency Crises, and Sovereign Credit Ratings

Sovereign credit ratings play an important part in determiningcountries' access to international capital markets and the termsof that access. In principle, there is no reason to expect thatsovereign credit ratings should systematically predict currencycrises. In practice, in emerging market economies there is astrong link between currency crises and default. Hence if creditratings are forward-looking and currency crises in emergingmarket economies are linked to defaults, it follows that downgradesin credit ratings should systematically precede currency crises.This article presents results suggesting that sovereign creditratings systematically fail to predict currency crises but doconsiderably better in predicting defaults. Downgrades in creditratings usually follow currency crises, possibly suggestingthat currency instability increases the risk of default.