This paper examines the effects of bond liquidity on firms’ investments. We postulate that bond liquidity increases firms’ investment opportunities by reducing the cost of capital and improving access to financing. Using the exogenous variation in liquidity generated by the introduction of TRACE, we find that bond liquidity enables firms to expand capital expenditures and acquisition activity. Furthermore, by enhancing access to funding, bond liquidity facilitates acquisition financing and reduces the likelihood of investment delays. The investments are value-increasing, as we find favorable market reactions to acquisitions and a positive impact of bond liquidity on market valuations and profitability. 

Keywords: Liquidity, Investment, Mergers and Acquisitions
JEL Classification Numbers: G34, G32​