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This paper studies the interaction between dealer markets and a relatively new form of exchange, passive crossing networks, where buyers and sellers trade directly with one another. We find that the crossing network is characterized by both positive ("liquidity") and negative ("crowding") externalities, and we analyze the effects of its introduction on the dealer market. Traders who use the dealer market as a "market of last resort" can induce dealers to widen their spread and can lead to more efficient subsequent prices, but traders who only use the crossing network can provide a counterbalancing effect by reducing adverse selection and inventory holding costs. [ABSTRACT FROM AUTHOR]

Merton (1987) proposes that an increase in a firm's investor base increases the firm's value. In Japan, companies can reduce their stock's minimum trading unit--the number of shares in a "round lot"-- which facilitates trading in the stock by small investors. We find that a reduction in the minimum trading unit greatly increases a firm's base of individual investors and its stock liquidity, and is associated with a significant increase in the stock price. Further, the stock price appreciation is positively related to an increase in the number of shareholders. [ABSTRACT FROM AUTHOR]

We study the joint effect of the trading mechanism and the time at which transactions take place on the behavior of stock returns using data from Japan. The Tokyo Stock Exchange employs a periodic clearing procedure twice a day, at the opening of both the morning and the afternoon sessions. This enables us to discern the effect of the clearing mechanism from the effect of the overnight trading halt. While the periodic clearing at the beginning of the trading day is noisy and inefficient, the midday clearing transaction appears to be no worse than the two closing transactions. [ABSTRACT FROM AUTHOR]

The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing. [ABSTRACT FROM AUTHOR]

Merton's recent extension of the CAPM proposed that asset returns are an increasing function of their beta risk, residual risk, and size and a decreasing function of the public availability of information about them. Associating the latter with asset liquidity and following Amihud and Mendelson's proposition that asset returns increase with their illiquidity (measured by the bid-ask spread), we jointly estimate the effects of these four factors on stock returns. [ABSTRACT FROM AUTHOR]

This paper studies a laboratory market where an agent is paid by a principal to provide a service of unknown quality. It is useful to place this model in the context of studies on markets with quality variation: the quality variation may be either exogenous or endogenous; the setting may be single-period, finite-multiperiod, or infinite-period; quality may be set once and for all (in the first period) or adjusted dynamically; and the market structure may range between monopolistic and competitive [the italics identify the specific choices made by DeJong, Forsythe, and Lundholm (DFL)]. Clearly, the above suggests a number of alternative settings for future research and for interesting comparisons; for example, if quality is set once-and-for-all, we obtain a clear rationale for reputation formation—how will this effect be reflected in laboratory results? The paper presents interesting results which are examined in light of the predictions of two static models: a "lemons" model and a "ripoffs" model. The results indicate that the "ripoffs" model outperforms the "lemons" model, and furthermore there is evidence for more cooperative behavior than that predicted by the "ripoffs" model, namely, there are reputation effects. The authors allude to the results of Kreps, Milgrom, Roberts, and Wilson which, as they correctly argue, are difficult to operationalize in the current setting; clearly, the analysis would benefit from the guidance of an explicit multiperiod model. In the following section, I suggest an approach to modeling the problem at hand. [ABSTRACT FROM AUTHOR]

The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected aftertax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that differences-and, perhaps even more important, sudden changes-in liquidity can have major effects on the pricing of corporate stocks and bonds or, equivalently, on investors' required returns for holding them. The authors also suggest that the liquidity of a company's securities can be managed by corporate policies and actions. For those companies whose value is likely to be increased by having more liquid securities-which is by no means true of all companies (for example, mature firms with little need for outside equity are likely to benefit from having more concentrated ownership and hence less liquidity)-management should consider actions such as reducing leverage and substituting dividends for stock repurchases as well as measures designed to increase the effectiveness of their disclosure and investor relations program and the size of their retail investor base. [ABSTRACT FROM AUTHOR]

The theory of corporate finance has been based on the idea that a company's market value is determined mainly by just two variables: the company's expected after-tax operating cash flows or earnings, and the risk associated with producing them. The authors argue that there is another important factor affecting a company's value: the liquidity of its own securities, debt as well as equity. The paper supports this argument by reviewing the large and growing body of evidence showing that differences—and changes—in liquidity can have major effects on the pricing of corporate stocks and bonds or, equivalently, on investors' required returns for holding them. The authors also suggest that the liquidity of a company's securities can be managed by corporate policies and actions. For those companies whose value is likely to be increased by having more liquid securities—which is by no means true of all companies (mature firms that don't need outside capital may well benefit from having more concentrated ownership and hence less liquidity)—management should consider actions such as reducing leverage and substituting dividends for stock repurchases as well as measures designed to increase the effectiveness of their disclosure and investor relations program and the size of their investor base. [ABSTRACT FROM AUTHOR]

One of the most fundamental market mechanisms is the clearing house, where orders are accumulated over time and the market is cleared periodically. The issue addressed in this study is the statistical behavior of the market under this neutral mechanism in the framework of a tractable stochastic model which captures the underlying uncertainties and indivisibilities in the demand and supply schedules. Applying renewal theory, we derive closed-form results for the behavior of prices and quantities, and pursue the implications of the possibility of no-trade and the multiplicity of market-clearing prices. [ABSTRACT FROM AUTHOR]

This paper derives a two-sample non-parametric procedure for testing quantile-preserving spreads. The asymptotic properties of the test statistic are studied, and the use of the test is demonstrated in comparing the dispersion of the returns on a stock-index between months. [ABSTRACT FROM AUTHOR]