Research On The Influence Of Stock Liquidity On Default Risk

With the prosperity of economy,stock market of China is constantly improving and developing,and playing an increasingly positive role in optimizing resource disposition,deepening economic system reform,and promoting the healthy development of enterprises.However,the booming stock market also brings more and more risks,especially the default risk.Default occurs when a firm's cash flows are insufficient to cover its debt service costs and principal payments.Default risk increases when a firm's average cash flow level shifts down or its cash flow volatility increases,which will seriously affect the normal operation of the company and bring devastating blows to the company.In the stock market,the increase of stock liquidity is often accompanied by the prosperity of the real economy and the activity of the stock market,which will bring good returns and continuous cash flow to enterprises,which is of great significance to reduce default risk.If it can be proved that stock liquidity has a significant impact on default risk,then the prevention and control of default risk will have a solution.Based on this background,this paper studies the influence of stock liquidity on default risk and the mechanism of the influence.This paper uses the financial data indicators of all Shanghai A-share companies except ST and PT in China's stock market from 2000 to 2017,usees expected default frequency index constructed by Bharath and Shumway(2008)[2]to measure default risk,and uses Amihud(2002)[17],Turnover and Lotto measure stock liquidity.On this basis,firstly,we find a negative influence of liquidity on default risk through univariate analysis.Then,considering that there are still other factors besides stock liquidity that will affect the default risk,this paper testes the influence of liquidity on the default risk through the multivariable analysis.The conclusion shows that stock liquidity still has a significant negative influence on the default risk in the presence of interfering factors.That is,the greater the stock liquidity,thelower the default risk.Further,the robustness of the negative impact of stock liquidity on default risk is verified through the Difference In Difference Propensity Score Matching(PSM-DID).Finally,we have explored the mechanism of the influence of liquidity on default risk,and put forward countermeasures and suggestions to prevent and control default risk.Default risk has always had a serious negative effect on the normal operation of enterprises and the healthy development of the stock market,threatening the safety and stability of the financial market,and has become a strong resistance to the steady development of the financial market.By studying the influence of stock liquidity on default risk,this paper concludes that stock liquidity has a significant negative impact on default risk,which not only enriches the liquidity-related asset pricing theory literature,but also has important practical significance for the healthy operation of listed companies and the construction of harmonious and stable financial markets.