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The Real Effects of Financing and Trading Frictions

Published online by Cambridge University Press:  31 October 2023

Francesca Zucchi Open the ORCID record for Francesca Zucchi [Opens in a new window]
Francesca Zucchi*
Affiliation:
DG Research, European Central Bank
*
francesca.zucchi@ecb.europa.eu
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Abstract

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I develop a model revealing the interplay between a stock’s liquidity and the policies and value of the issuing firm. The model shows that bid-ask spreads increase not only the firm’s cost of capital but also the opportunity cost of cash, then lowering cash reserves, increasing liquidation risk, and reducing firm value. These outcomes are stronger when internalized by liquidity providers, simultaneously leading to a wider bid-ask spread. A two-way relation between the firm and the liquidity of its stock arises, implying that shocks arising within the firm or in the stock market have more complex implications than previously understood.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 8 , December 2024 , pp. 3835 - 3870
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

I thank an anonymous referee and Thierry Foucault (the editor) for insightful guidance, as well as Pierre Collin-Dufresne, Sebastian Gryglewicz, Semyon Malamud, Erwan Morellec, and Boris Nikolov for many helpful conversations. I also thank Jack Bao, Isabella Blengini, Anna Cieslak, Stefano Colonnello, Marco Della Seta, Michael Fishman, Luigi Guiso, Giang Hoang, Julien Hugonnier, Dalida Kadyrzhanova, Nataliya Klimenko, Arvind Krishnamurthy, Antonio Mello, Konstantin Milbradt, Kjell Nyborg, Dimitris Papanikolaou, Sebastian Pfeil, Paola Sapienza, Costis Skiadas, Philip Valta, Zexi Wang, Peng Zhun, and the seminar participants at the Bank of Italy, Caltech, Copenhagen Business School, EPFL/University of Lausanne, the Federal Reserve Board, HEC Paris, Johns Hopkins University, Northwestern University, KU Leuven, the London School of Economics, the Stockholm School of Economics, the Toulouse School of Economics, the University of Wisconsin–Madison, the University of Zurich, WU Vienna, and the Econometric Society Winter Meeting for useful comments. Any remaining errors are my own. The views expressed are those of the author and should not be interpreted as reflecting the views of the European Central Bank or the Eurosystem.

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