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

  • Skjeltorp, Johannes A

    ()

    (Norges Bank)

  • Odegaard, Bernt Arne

    ()

    (University of Stavanger)

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.

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File URL: http://www1.uis.no/ansatt/odegaard/uis_wps_econ_fin/uis_wps_2010_3_skjeltorp_odegaard.pdf
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Paper provided by University of Stavanger in its series UiS Working Papers in Economics and Finance with number 2010/3.

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Length: 23 pages
Date of creation: 28 Apr 2010
Date of revision:
Publication status: Forthcoming as Skjeltorp, Johannes A and Bernt Arne Odegaard, 'Why do firms pay for liquidity provision in limit order markets?' in Financial Management.
Handle: RePEc:hhs:stavef:2010_003
Contact details of provider: Postal: University of Stavanger, NO-4036 Stavanger, Norway
Web page: http://www.uis.no/research/economics_and_finance
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