סמינר במימון חשבונאות
Debt, Information, and Illiquidity
Effi Benmelech, Northwestern University
What determines liquidity in debt markets? This paper shows that bonds become more illiquid when their prices decline. We conduct a battery of cross-sectional tests that pertain to predictions stemming from asymmetric-information security-design-based
models of debt liquidity. Our results confirm the notion that liquidity is determined by the informational sensitivity structure of debt contracts. When debt is deep in the money, it becomes informationally insensitive and more liquid. In contrast, when
firm value deteriorates toward the left tail, the value of debt becomes informationally sensitive and less liquid. Our results shed new empirical light on the informational nature of “safe assets” and the determinants of their informational sensitivity and
liquidity.