The Bright Side of Financial Fragility

Abstract

We highlight an important but overlooked characteristic of financial fragility: “fragile” stocks are more liquid because they are sensitive to non-fundamental liquidity shocks. This reduces their sensitivity to corporate actions with price impact and affects the firms’ incentives to engage in such actions. We show that fragile firms have lower share repurchases but invest more and the effect is stronger for financially constrained firms. We establish causality by relating changes in corporate actions to exogenous changes in fragility induced by mergers of asset managers. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.