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We document the negative effect of stock liquidity on default risk for a sample of 46 countries. We further find that default risk declines following the introduction of the Directive on Markets in Financial Instruments (MiFID) an exogenous shock that increases liquidity. The effect of liquidity on default risk is more pronounced in countries with poorer investor protection and information environments. Further, this effect is attenuated (strengthened) for firms with greater information efficiency (governance monitoring). Overall, our findings highlight the important role of regulatory settings in shaping the impact of stock liquidity on default risk in international markets.

Financial instrumentsDefault riskGovernance monitoringInformation environmentInvestor protectionEgulatory settingsStock liquidity