Does Stock Market Illiquidity Influence the Cost of Borrowing? Evidence from Syndicated Loans

Abstract

We show that firms with illiquid stock pay higher syndicated loan spreads. This result is invariant to multiple measurements of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and year fixed effects. This result also holds using matched difference-in-differences at an exogenous reduction in the minimum tick size of major United States exchanges and using a two-stage least squares estimator. Stock illiquidity is, moreover, shown to diminish the benefit to the loan recipient of a lending relationship. A rationale for these findings is that stock market illiquidity impairs the bargaining power of corporate borrowers, in the loan spread negotiating procedure, as it raises the cost of alternatively issuing equity. Our findings, thus, indicate that relative bargaining power plays a systematic role in determining syndicated loan spreads.