Open AccessInvestor Protection, Stock Liquidity, and Capital Structure
Author(s) -
Chuong Hong Pham,
Hoang D. Le,
Hung Quoc Dang,
Uyen Tu Bui
Publication year - 2020
Publication title -
international journal of financial research
Language(s) - English
Resource type - Journals
eISSN - 1923-4031
pISSN - 1923-4023
DOI - 10.5430/ijfr.v11n4p357
Subject(s) - market liquidity , business , leverage (statistics) , monetary economics , stock (firearms) , capital structure , financial economics , economics , finance , mechanical engineering , debt , machine learning , computer science , engineering
This paper investigates empirically the impact of stock liquidity and investor protection on corporate capital structure. We predict that stock liquidity has a significantly negative impact on firm leverage and this negative impact is stronger in a country where the investor protection is strong. The sample consists of 2,203 firms listed in the UK, Germany, France, and Italy over the period from 2009 to 2018. Using a firm fixed effects model, we find evidence supporting our prediction. Our results are robust when we use a random effects model model, or when we employ an alternative measure of investor protection. Additionally, we find that an exogenous event that reduced the investor protection could dampen the negative impact of stock liquidity on firm leverage. Our paper suggests that future studies should consider the effects of factors related to the level of investor protection when investigating the relationship between stock liquidity and firm characteristics, such as firms’ default risk.