The Moderating Influence of Corporate Debt on the Relationship between Free-Floating Shares and Stock Market Liquidity : Is the Effect Asymmetric?

The question of whether corporate debt can impact free-floating shares and stock liquidity is still a controversial research topic until recently. Using a sample of the 411 largest US non-financial firms over the period 2007-2017, our analysis shows that more corporate debt weakens the influence of free-floating shares on stock liquidity; contradicting the capital and ownership structures theory. Firms with higher corporate debt use lesser free-floating shares. We also show that stock liquidity asymmetrically responds to low and high corporate debt as well as to low and high free-floating shares. The global financial crisis (GFC) of 2007-2008 had a higher influence on weakening the relationship between corporate debt (or free-floating shares) and stock liquidity compared to the oil price crash (OPC) of 2014-2016. This paper serves as a guide to managers and market participants in assessing the reliance on corporate debt and free-floating shares in influencing stock market liquidity