IDEAS home Printed from https://ideas.repec.org/p/hhs/stavef/2010_003.html
   My bibliography  Save this paper

Why do firms pay for liquidity provision in limit order markets?

Author

Listed:
  • Skjeltorp, Johannes A

    () (Norges Bank)

  • Odegaard, Bernt Arne

    () (University of Stavanger)

Abstract

In recent years, a number of electronic limit order have reintroduced market makers for some securities (Designated Market Makers). This trend has mainly been initiated by financial intermediaries and listed firms themselves, without any regulatory pressure. In this paper we ask why firms are willing to pay to improve the secondary market liquidity of its shares. We show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares. We also find some evidence of agency costs, managers desiring good liquidity when they plan insider trades.

Suggested Citation

  • Skjeltorp, Johannes A & Odegaard, Bernt Arne, 2010. "Why do firms pay for liquidity provision in limit order markets?," UiS Working Papers in Economics and Finance 2010/3, University of Stavanger.
  • Handle: RePEc:hhs:stavef:2010_003
    as

    Download full text from publisher

    File URL: http://www1.uis.no/ansatt/odegaard/uis_wps_econ_fin/uis_wps_2010_3_skjeltorp_odegaard.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    2. Harris, Lawrence E. & Panchapagesan, Venkatesh, 2005. "The information content of the limit order book: evidence from NYSE specialist trading decisions," Journal of Financial Markets, Elsevier, vol. 8(1), pages 25-67, February.
    3. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    4. Næs, Randi & Skjeltorp, Johannes & Ødegaard, Bernt Arne, 2009. "What factors affect the Oslo Stock Exchange?," UiS Working Papers in Economics and Finance 2009/33, University of Stavanger.
    5. Edith Ginglinger & Laure Matsoukis & Fabrice Riva, 2009. "Stock Market Liquidity and the Rights Offer Paradox," Post-Print halshs-00673292, HAL.
    6. Randi Næs & Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2011. "Stock Market Liquidity and the Business Cycle," Journal of Finance, American Finance Association, vol. 66(1), pages 139-176, February.
    7. Anand, Amber & Tanggaard, Carsten & Weaver, Daniel G., 2009. "Paying for Market Quality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1427-1457, December.
    8. Fang, Vivian W. & Noe, Thomas H. & Tice, Sheri, 2009. "Stock market liquidity and firm value," Journal of Financial Economics, Elsevier, vol. 94(1), pages 150-169, October.
    9. Banerjee, Suman & Gatchev, Vladimir A. & Spindt, Paul A., 2007. "Stock Market Liquidity and Firm Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(02), pages 369-397, June.
    10. Glosten, Lawrence R. & Milgrom, Paul R., 1985. "Bid, ask and transaction prices in a specialist market with heterogeneously informed traders," Journal of Financial Economics, Elsevier, vol. 14(1), pages 71-100, March.
    11. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    12. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    13. Glosten, Lawrence R, 1994. " Is the Electronic Open Limit Order Book Inevitable?," Journal of Finance, American Finance Association, vol. 49(4), pages 1127-1161, September.
    14. Lipson, Marc L. & Mortal, Sandra, 2009. "Liquidity and capital structure," Journal of Financial Markets, Elsevier, vol. 12(4), pages 611-644, November.
    15. repec:dau:papers:123456789/3035 is not listed on IDEAS
    16. Brockman, Paul & Howe, John S. & Mortal, Sandra, 2008. "Stock market liquidity and the decision to repurchase," Journal of Corporate Finance, Elsevier, vol. 14(4), pages 446-459, September.
    17. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    18. repec:dau:papers:123456789/8625 is not listed on IDEAS
    19. Lesmond, David A & Ogden, Joseph P & Trzcinka, Charles A, 1999. "A New Estimate of Transaction Costs," Review of Financial Studies, Society for Financial Studies, vol. 12(5), pages 1113-1141.
    20. Anand, Amber & Subrahmanyam, Avanidhar, 2008. "Information and the Intermediary: Are Market Intermediaries Informed Traders in Electronic Markets?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(01), pages 1-28, March.
    21. repec:dau:papers:123456789/2939 is not listed on IDEAS
    22. Randi Næs & Johannes A. Skjeltorp & Bernt Arne Ødegaard, 2008. "Liquidity at the Oslo Stock Exchange," Working Paper 2008/09, Norges Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Rakkestad, Ketil & Skjeltorp, Johannes & Ødegaard, Bernt Arne, 2012. "The liquidity of the Secondary Market for Debt Securities in Norway," UiS Working Papers in Economics and Finance 2012/12, University of Stavanger.
    2. Benos, Evangelos & Wetherilt, Anne, 2012. "The role of designated market makers in the new trading landscape," Bank of England Quarterly Bulletin, Bank of England, vol. 52(4), pages 343-353.

    More about this item

    Keywords

    Market microstructure; Corporate Finance; Designated Market Makers; Insider Trading;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:stavef:2010_003. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernt Arne Odegaard). General contact details of provider: http://edirc.repec.org/data/iouisno.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.