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This paper compares centralized and fragmented markets, such as floor and telephone markets. Risk-averse agents compete for one market order. In centralized markets, these agents are market makers or limit order traders. They are assumed to observe the quotes of their competitors. In fragmented markets they are dealers. They can only assess the positions of their competitors. We analyze differences in bidding strategies reflecting differences in market structures. The equilibrium number of dealers is shown to be increasing in the frequency of trades and the volatility of the value of the asset. The expected spread is shown to be equal in both markets, ceteris paribus. But the spread is more volatile in centralized than in fragmented markets. [ABSTRACT FROM AUTHOR]

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financial contracts can be implemented by a combination of debt and equity when the risk-shifting problem is the most severe while stock options are also needed when the effort problem is the most severe. Worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level. Moreover, aggregate leverage decreases with the risk-shifting problem and increases with the effort problem. [ABSTRACT FROM AUTHOR]

As a centralized, computerized, limit order market, the Paris Bourse is particularly appropriate for studying the interaction between the order book and order flow. Descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the depth of the book is somewhat larger at nearby valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books result in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases). [ABSTRACT FROM AUTHOR]

A correction to the article "Competing Mechanisms in a Common Value Environment" that was published in the 2000 issue is presented.

We study a continuous-time principal-agent model in which a risk-neutral agent with limited liability must exert unobservable effort to reduce the likelihood of large but relatively infrequent losses. Firm size can be decreased at no cost or increased subject to adjustment costs. In the optimal contract, investment takes place only if a long enough period of time elapses with no losses occurring. Then, if good performance continues, the agent is paid. As soon as a loss occurs, payments to the agent are suspended, and so is investment if further losses occur. Accumulated bad performance leads to downsizing. We derive explicit formulae for the dynamics of firm size and its asymptotic growth rate, and we provide conditions under which firm size eventually goes to zero or grows without bounds. [ABSTRACT FROM AUTHOR]

We analyze a game between citizens and governments, whose type (benevolent or predatory) is unknown to the public. Opportunistic governments mix between predation and restraint. As long as restraint is observed, political expectations improve, people enter the modern sector, and the economy grows. Once there is predation, the reputation of the government is ruined and the economy collapses. If citizens are unable to overthrow this government, the collapse is durable. Otherwise, a new government is drawn and the economy can rebound. Consistent with stylized facts, equilibrium political and economic histories are random, unstable, and exhibit long-term divergence. [ABSTRACT FROM AUTHOR]

We study how early-stage new ideas are turned into successful businesses. Even promising ideas can be unprofitable if they fail on one dimension, such as technical feasibility, correspondence to market demand, legality, or patentability. To screen good ideas, the entrepreneur needs to hire experts who evaluate the idea along their dimensions of expertise. Sharing the idea, however, creates the risk that the expert would steal it. Yet, the idea-thief cannot contact any other expert, lest he should in turn steal the idea. Thus, stealing leads to incomplete screening and is unattractive if the information of the other expert is critical and highly complementary. In such cases, the entrepreneur can form a partnership with the experts, thus granting them the advantage of accessing each other's information. Yet, very valuable ideas cannot be shared because it is too tempting to steal them. [ABSTRACT FROM AUTHOR]

Consider strategic risk‐neutral traders competing in schedules to supply liquidity to a risk‐averse agent who is privately informed about the value of the asset and his hedging needs. Imperfect competition in this common value environment is analyzed as a multi‐principal game in which liquidity suppliers offer trading mechanisms in a decentralized way. Each liquidity supplier behaves as a monopolist facing a residual demand curve resulting from the maximizing behavior of the informed agent and the trading mechanisms offered by his competitors. There exists a unique equilibrium in convex schedules. It is symmetric and differentiable and exhibits typical features of market‐power: Equilibrium trading volume is lower than ex ante efficiency would require. Liquidity suppliers charge positive mark‐ups and make positive expected profits, but these profits decrease with the number of competitors. In the limit, as this number goes to infinity, ask (resp. bid) prices converge towards the upper (resp. lower) tail expectations obtained in Glosten (1994) and expected profits are zero. [ABSTRACT FROM AUTHOR]

In the Paris Bourse some stocks are traded on a spot basis, while others are traded on a monthly settlement basis. The latter are likely to be less subject to leverage and short sales constraints. We empirically analyse the consequences of this difference for the order flow and the return process. Consistent with the theoretical analysis of Diamond and Verrechia (1987), we find that market sell orders are less frequent on the spot market than on the monthly settlement market (although not very significantly) and that the spot market reflects good news (significantly) faster than bad news. [ABSTRACT FROM AUTHOR]

Many public statistics are closely followed by the public as they provide valuable information for decision making. Although economic theory suggests that low‐latency traders (LLTs) can earn excess arbitrage profits from trading on public statistics releases due to their speed advantage, the empirical literature fails to find meaningful LLTs' stock market profits when trading on macroeconomic statistical releases. Here we confirm previous findings with improved techniques, but also show that excess profits can be earned quickly in agricultural commodity futures markets around United States Department of Agriculture (USDA) statistical releases. We attribute differences in the magnitude of the profits to the straightforward nature of the information and to the direct relevance of the reports to traders for the markets considered. Motivated by market concerns, USDA and the United States Department of Labor recently changed their news media prerelease lockup policy to mitigate LLTs' speed advantage. However, we find the policy change had little effect on the speed advantage as no significant reduction in LLTs' profits occurred. Implications of the research are relevant for government agencies concerned with mitigating LLT speed advantages particularly during the release of public statistical information. [ABSTRACT FROM AUTHOR]

We investigate how risk aversion (RA) shapes the informative content of prices in an experimental asset market, where traders are sorted according to their RA. RA should induce steeper individual demands and, under its most common parametrizations, drive equilibrium prices closer to revealing the state. Results support the prediction on individual demands, but not the prediction on prices, which do not vary with RA and are close to the risk‐neutral benchmark. This purported conflict is due to traders, particularly the more risk‐averse ones, conveying into prices only part of their information. [ABSTRACT FROM AUTHOR]

We study a principal–agent model with moral hazard and adverse selection. Risk‐neutral agents with limited liability have arbitrary private information about the distribution of outputs and the cost of effort. We show that under a multiplicative separability condition, the optimal mechanism offers a single contract. This condition holds, for example, when output is binary. If the principal's payoff must also satisfy free disposal and the distribution of outputs has the monotone likelihood ratio property, the mechanism offers a single debt contract. Our results generalize if the output distribution is "close" to multiplicatively separable. Our model suggests that offering a single contract may be optimal in environments with adverse selection and moral hazard when agents are risk‐neutral and have limited liability. [ABSTRACT FROM AUTHOR]

We study the effects of diverse beliefs on equilibrium securitization under risk neutrality. We provide a simple characterization of the optimal securities. Pooling and tranching of assets emerges in equilibrium as a consequence of the traders' diverse beliefs about asset returns. The issuer of securities tranches the asset pool, and traders sort among the tranches according to their beliefs. We show how the traders' disagreement about the correlation of asset returns is a key factor in determining which assets are pooled. [ABSTRACT FROM AUTHOR]

This paper studies the optimal clearing arrangement for bilateral financial contracts in which an assessment of counterparty credit risk is crucial for efficiency. The economy is populated by borrowers and lenders. Borrowers are subject to limited commitment and hold private information about the severity of such lack of commitment. Lenders can acquire information, at a cost, about the commitment of their borrowers, which affects the assessment of counterparty risk. Clearing through a central counterparty allows lenders to mutualize counterparty credit risk, but this insurance may weaken incentives to acquire and reveal information. If information acquisition is incentive‐compatible, then lenders choose central clearing. If it is not, they may prefer bilateral clearing either to prevent strategic default or to optimize the allocation of costly collateral. [ABSTRACT FROM AUTHOR]

The Commodity Futures Trading Commission (CFTC) recently identified large intra‐day price changes or "flash events" in continuously traded commodity futures markets. These flash events fueled discussion on whether futures markets are becoming less effective as human intervention is diminishing in favor of automated trading. Using intra‐day data, we examine liquidity resilience during "flash events" in corn and lean hog futures markets from 2014 to 2019. Overall, we find little evidence that the liquidity provision in these two markets relative to normal days becomes fragile when large price movements occur. Our analysis suggests that flash events are heavily influenced by unanticipated changes in fundamentals that may lead to a new equilibrium price. Liquidity dynamics during these events supports the view that active market making helps absorb the increased volume and stabilize markets. [ABSTRACT FROM AUTHOR]

We study banks' incentive to pool assets of heterogeneous quality when investors evaluate pools by extrapolating from limited sampling. Pooling assets of heterogeneous quality induces dispersion in investors' valuations without affecting their average. Prices are determined by market clearing assuming that investors can neither borrow nor short‐sell. A monopolistic bank has the incentive to create heterogeneous bundles only when investors have enough money. When the number of banks is sufficiently large, oligopolistic banks choose extremely heterogeneous bundles, even when investors have little money and even if this turns out to be collectively detrimental to the banks. If, in addition, banks can originate low quality assets, even at a cost, this collective inefficiency is exacerbated and pure welfare losses arise. Robustness to the presence of rational investors and to the possibility of short‐selling is discussed. [ABSTRACT FROM AUTHOR]

Standard credit risk models cannot explain the observed clustering of default, sometimes described as “credit contagion.” This paper provides the first empirical analysis of credit contagion via direct counterparty effects. We find that bankruptcy announcements cause negative abnormal equity returns and increases in CDS spreads for creditors. In addition, creditors with large exposures are more likely to suffer from financial distress later. This suggests that counterparty risk is a potential additional channel of credit contagion. Indeed, the fear of counterparty defaults among financial institutions explains the sudden worsening of the credit crisis after the Lehman bankruptcy in September 2008. [ABSTRACT FROM AUTHOR]

We investigate simultaneously the impact of promotion-based tournament incentives for VPs and equity-based (alignment) incentives for VPs and the chief executive officer (CEO) on firm performance. We find that tournament incentives, as measured by the pay differential between the CEO and VPs, relate positively to firm performance. The relation is more positive when the CEO nears retirement and less positive when the firm has a new CEO, and weakens further when the new CEO is an outsider. Our analysis is robust to corrections for endogeneity of all our incentive measures and to several alternative measures of tournament incentives and firm performance. [ABSTRACT FROM AUTHOR]

This study analyzes the role that two psychological attributes—sensation seeking and overconfidence—play in the tendency of investors to trade stocks. Equity trading data from Finland are combined with data from investor tax filings, driving records, and mandatory psychological profiles. We use these data, obtained from a large population, to construct measures of overconfidence and sensation seeking tendencies. Controlling for a host of variables, including wealth, income, age, number of stocks owned, marital status, and occupation, we find that overconfident investors and those investors most prone to sensation seeking trade more frequently. [ABSTRACT FROM AUTHOR]

Our objective is to identify the trading strategy that would allow an investor to take advantage of “excessive” stock price volatility and “sentiment” fluctuations. We construct a general equilibrium “difference-of-opinion” model of sentiment in which there are two classes of agents, one of which is overconfident about a public signal, while still optimizing intertemporally. Overconfident investors overreact to the signal and introduce an additional risk factor causing stock prices to be excessively volatile. Consequently, rational investors choose a conservative portfolio; moreover, this portfolio depends not just on the current price divergence but also on their prediction about future sentiment and the speed of price convergence. [ABSTRACT FROM AUTHOR]

We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross-country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle. [ABSTRACT FROM AUTHOR]

In practice, heterogeneously informed speculators combine private information about multiple stocks with information in prices, taking into account how their trades influence the inferences of other speculators via prices. We show how this speculation causes prices to be more correlated than asset fundamentals, raising price volatility. The covariance structure of asset fundamentals drives that of prices, while the covariance structure of liquidity trade drives that of order flows. We characterize how speculator profits vary with the distributions of information and liquidity trade across assets and speculators, and relate the cross-asset factor structure of order flows to that of returns. [ABSTRACT FROM AUTHOR]

We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of the LSE. Moreover, cross-sectionally, we find that a higher trade-through rate in the entrant market coincides with less liquidity supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting limit orders against trade-throughs is important. [ABSTRACT FROM AUTHOR]

This paper studies an overlapping generations model with multiple securities and heterogeneously informed agents. The model produces multiple equilibria, including highly volatile equilibria that can exhibit strong or weak correlations between asset returns—even when asset supplies and future dividends are uncorrelated across assets. Less informed agents rationally behave like trend-followers, while better informed agents follow contrarian strategies. Trading volume has a hump-shaped relation with information precision and is positively correlated with absolute price changes. Finally, accurate information increases the volatility and correlation of stock returns in the highly volatile, strongly correlated equilibrium. [ABSTRACT FROM AUTHOR]

I present a simple model of informed trading in which asset values are derived from imperfectly competitive product markets and private information events occur at individual firms. The model predicts that informed traders may have incentives to make information-based trades in the stocks of competitors, especially when events occur at firms with large market shares. In the context of 759 earnings announcements, I use intraday transactions data to test the hypothesis that net order flow and returns in the stocks of nonannouncing competitors have information content for announcing firms. [ABSTRACT FROM AUTHOR]

This paper studies a financial market populated by adaptive traders. Learning is modeled following Camerer and Ho (1999) . A call market and a Walrasian tatonnement are compared in an environment in which both institutions have the same Nash and competitive equilibrium outcomes. When traders learn via a belief-based model, equilibrium is discovered in both types of markets. In contrast, when traders learn via a reinforcement-based model, convergence to equilibrium is achieved in the Walrasian tatonnement but not in the call market. This paper suggests that market mechanisms can be designed to foster traders' learning of equilibrium strategies. [ABSTRACT FROM AUTHOR]

The article presents a report from the American Finance Association's editor of the "Journal of Finance" for the year 2006. The journal's success for that year is credited to the previous editor. Information about the numbers of articles submitted to the magazine and the number of times articles published in it were cited by other authors is provided. A discussion of the review process and turnaround time is presented and the contributions of key members of the journal's staff are acknowledged. Prizes awarded for distinguished articles are also discussed.

I model strategic interaction among issuers, underwriters, retail investors, and institutional investors when the secondary market has limited price transparency. Search costs for retail investors lead to price dispersion in the secondary market, while the price for institutional investors is infinitely elastic. Because retail distribution capacity is assumed to be limited for each underwriter-dealer, Bertrand competition breaks down in the primary market and new issues are underpriced in equilibrium. Syndicates emerge in which underwriters bid symmetrically, with quantities allocated internally to efficiently utilize retail distribution capacity. [ABSTRACT FROM AUTHOR]

We analyze limit order markets and floor exchanges, assuming an informed trader and discretionary liquidity traders use market orders and can either submit block orders or work their demands as a series of small orders. By working their demands, large market order traders pool with small traders. We show that every equilibrium on a floor exchange must involve at least partial pooling. Moreover, there is always a fully pooling (worked order) equilibrium on a floor exchange that is equivalent to a block order equilibrium in a limit order market. [ABSTRACT FROM AUTHOR]

We analyze cross-sectional and time-series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices. We find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced. A common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic. We find strong evidence that in markets where short selling is either prohibited or not practiced, market returns display significantly less negative skewness. [ABSTRACT FROM AUTHOR]

Using a complete record of U.S. over-the-counter (OTC) secondary trades in corporate bonds, we estimate average transaction costs as a function of trade size for each bond that traded more than nine times between January 2003 and January 2005. We find that transaction costs decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds close to maturity have lower transaction costs than do other bonds. Costs are lower for bonds with transparent trade prices, and they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders benefit significantly from price transparency. [ABSTRACT FROM AUTHOR]

A number of firms in the United Kingdom list without issuing equity and then issue equity shortly thereafter. We argue that this two-stage offering strategy is less costly than an initial public offering (IPO) because trading reduces the valuation uncertainty of these firms before they issue equity. We find that initial returns are 10% to 30% lower for these firms than for comparable IPOs, and we provide evidence that the market in the firm's shares lowers financing costs. We also show that these firms time the market both when they list and when they issue equity. [ABSTRACT FROM AUTHOR]

This paper provides option pricing and volume implications for an economy with heterogeneous agents who face model uncertainty and have different beliefs on expected returns. Market incompleteness makes options nonredundant, while heterogeneity creates a link between differences in beliefs and option volumes. We solve for both option prices and volumes and test the joint empirical implications using S&P500 index option data. Specifically, we use survey data to build an Index of Dispersion in Beliefs and find that a model that takes information heterogeneity into account can explain the dynamics of option volume and the smile better than can reduced-form models with stochastic volatility. [ABSTRACT FROM AUTHOR]

We derive the optimal dynamic contract in a continuous-time principal-agent setting, and implement it with a capital structure (credit line, long-term debt, and equity) over which the agent controls the payout policy. While the project's volatility and liquidation cost have little impact on the firm's total debt capacity, they increase the use of credit versus debt. Leverage is nonstationary, and declines with past profitability. The firm may hold a compensating cash balance while borrowing (at a higher rate) through the credit line. Surprisingly, the usual conflicts between debt and equity (asset substitution, strategic default) need not arise. [ABSTRACT FROM AUTHOR]

We present a method to estimate the gains from trade in limit-order markets and provide empirical evidence that the limit-order market is a good market design. Using observations on order submissions and execution and cancellation histories, we estimate both the distribution of traders' unobserved valuations for the stock and latent trader arrival rates. We use the resulting estimates to compute the current gains from trade, the gains from trade in a perfectly liquid market, and the gains from trade with a monopoly liquidity supplier. The current gains are 90% of the maximum gains and 150% of the monopolist gains. [ABSTRACT FROM AUTHOR]

We model a dynamic limit order market as a stochastic sequential game with rational traders. Since the model is analytically intractable, we provide an algorithm based on Pakes and McGuire (2001) to find a stationary Markov-perfect equilibrium. We then generate artificial time series and perform comparative dynamics. Conditional on a transaction, the midpoint of the quoted prices is not a good proxy for the true value. Further, transaction costs paid by market order submitters are negative on average, and negatively correlated with the effective spread. Reducing the tick size is not Pareto improving but increases total investor surplus. [ABSTRACT FROM AUTHOR]

Our model assumes that creditors need to expend resources to collect on claims. Consequently, because diffuse creditors suffer from mutual free-riding (Holmstrom (1982)), they fare worse than concentrated creditors (e.g., a house bank). The model predicts that measures of debt concentration relate positively to creditors' (aggregate) debt collection expenditures and positively to management's chosen expenditures to resist paying. However, collection activity is purely redistributive, so social waste is larger when creditors are concentrated. If borrower quality is not known, the best firms choose the most concentrated creditors and pay higher expected yields. [ABSTRACT FROM AUTHOR]

How does quotation transparency affect financial market performance? Biais's irrelevance proposition in 1993 shows that centralized markets yield the same expected bid--ask spreads as fragmented markets, other things equal. However, de Frutos and Manzano demonstrated in 2002 that expected spreads in fragmented markets are smaller and market participants prefer to trade in fragmented markets. This paper introduces liquidity traders' costs of searching for a better quote into the Biais model and derives opposite conclusions to these previous studies: expected spreads in centralized markets are smaller and liquidity traders prefer centralized markets, while market makers prefer fragmented markets. [ABSTRACT FROM AUTHOR]

We study pre-trade transparency by looking at the introduction of NYSE's OpenBook service that provides limit-order book information to traders off the exchange floor. We find that traders attempt to manage limit-order exposure: They submit smaller orders and cancel orders faster. Specialists' participation rate and the depth they add to the quote decline. Liquidity increases in that the price impact of orders declines, and we find some improvement in the informational efficiency of prices. These results suggest that an increase in pre-trade transparency affects investors' trading strategies and can improve certain dimensions of market quality. [ABSTRACT FROM AUTHOR]

Conglomerates, trade credit arrangements, and banks are all instances of financial intermediation. However, these institutions differ significantly in the extent to which the projects financed absorb aggregate intermediary risk, in whether or not intermediation is carried out by a financial specialist, in the type of projects they fund and in the type of claims they issue to investors. The paper develops a simple unified model that both accounts for the continued coexistence of these different forms of intermediation, and explains why they differ. Specific applications to conglomerate firms, trade credit, and banking are discussed. [ABSTRACT FROM AUTHOR]

We examine the impact of political, institutional, and economic factors on the choice between selling a state-owned enterprise in the public capital market through a share issue privatization (SIP) and selling it in the private capital market in an asset sale. SIPs are more likely in less developed capital markets, for more profitable state-owned enterprises, and where there are more protections of minority shareholders. Asset sales are more likely when there is less state control of the economy and when the firm is smaller. Our results suggest the importance of privatization activities in developing the equity markets of privatizing countries. [ABSTRACT FROM AUTHOR]

In August 1999, U.S. exchanges began to compete directly for order flow in many options that had been exclusively listed on another exchange, shifting 37% of option volume to multiple-listing status by the end of September. Effective and quoted bid--ask spreads decrease significantly after multiple listings with spreads generally maintaining their initial lower levels 1 year later. These results hold for both time series and pooled regressions and are robust. We reject that economies of scale in market making cause the decrease in spreads and support the view that interexchange competition reduces option transaction costs. [ABSTRACT FROM AUTHOR]

This paper explores the competition between two trading venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs offer the advantages of anonymity and speed of execution, which attract informed traders. Thus, trades are more likely to occur on ECNs when information asymmetry is greater and when trading volume and stock-return volatility are high. ECN trades have greater permanent price impacts and more private information is revealed through ECN trades than though market-maker trades. However, ECN trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and offer them better executions. [ABSTRACT FROM AUTHOR]

This paper analyses the joint provision of effort by an entrepreneur and by an advisor to improve the productivity of an investment project. Without moral hazard, it is optimal that both exert effort. With moral hazard, if the entrepreneur's effort is more efficient (less costly) than the advisor's effort, the latter is not hired if she does not provide funds. Outside financing arises endogenously. This explains why investors like venture capitalists are value enhancing. The level of outside financing determines whether common stocks or convertible bonds should be issued in response to incentives. [ABSTRACT FROM AUTHOR]

This paper presents the first model where entry deterrence takes place through financial rather than product-market channels. In existing models, a firm's choice of financial instruments deters entry by affecting product market behavior; here entry deterrence occurs by affecting the credit market behavior of investors towards entrant firms. We find that to deter entry, the claims held on incumbent firms should be sufficiently risky, that is, equity. This contrasts with the standard Brander and Lewis (1986) result that debt deters entry. This effect is more marked the less competitive the credit market is--so more credit market competition spurs more product market competition. [ABSTRACT FROM AUTHOR]

This paper offers a new explanation for the prevalent use of convertible securities in venture capital finance. Convertible securities can be used to endogenously allocate cash-flow rights as a function of the state of the world and the entrepreneur's effort. This property can be used to induce the entrepreneur and the venture capitalist to invest efficiently into the project. The result is robust to renegotiation and to changes in the timing of investments and information flows. The model is consistent with the observations that conversion is often automatic and that convertible securities are rarely used by outside investors. [ABSTRACT FROM AUTHOR]

IPO underpricing reached astronomical levels during 1999 and 2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by marked changes in pre-IPO ownership structure and insider selling behavior over the period, which reduced key decision makers’ incentives to control underpricing. After controlling for these changes, the difference in underpricing between 1999 and 2000 and the preceding three years is much reduced. Our results suggest that it was firm characteristics that were unique during the "dot-com bubble" and that pricing behavior followed from incentives created by these characteristics. [ABSTRACT FROM AUTHOR]

The purpose of this study is to investigate the relation between investor protection and firm liquidity. We posit that less protective environments lead to wider bid-ask spreads and thinner depths because they fail to minimize information asymmetries. The Hong Kong equity market provides a unique opportunity to compare liquidity costs across distinct investor protection environments, but still within a common trading mechanism and currency. Our empirical findings verify that firm liquidity is significantly affected by investor protection. Regression and matched-sample results show that Hong Kong-based equities exhibit narrower spreads and thicker depths than their China-based counterparts. [ABSTRACT FROM AUTHOR]

We examine the contribution of cross-listings to price discovery for a sample of Canadian stocks listed on both the Toronto Stock Exchange (TSE) and a U.S. exchange. We find that prices on the TSE and U.S. exchange are cointegrated and mutually adjusting. The U.S. share of price discovery ranges from 0.2 percent to 98.2 percent, with an average of 38.1 percent. The U.S. share is directly related to the U.S. share of trading and to the ratio of proportions of informative trades on the U.S. exchange and the TSE, and inversely related to the ratio of bid-ask spreads. [ABSTRACT FROM AUTHOR]

Recent work suggests that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. For firms in poorly developed financial markets, implicit borrowing in the form of trade credit may provide an alternative source of funds. We show that industries with higher dependence on trade credit financing exhibit higher rates of growth in countries with weaker financial institutions. Furthermore, consistent with barriers to trade credit access among young firms, we show that most of the effect that we report comes from growth in the size of preexisting firms. [ABSTRACT FROM AUTHOR]