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Byline: Bruno Biais (1), Isabelle Martinez (2) Keywords: international financial markets integration; information asymmetries; market microstructure Abstract: We study opening prices set simultaneously for German and French stocks inFrankfurt and Paris. In our model investors and traders based in the samecountry as the firm have better information on its value than foreigntraders. Our theory implies that prices set on the domestic market differfrom (and are more informationally efficient than) prices set on the foreignmarket. Empirically, we find significant price discrepancies between homeand foreign prices, consistent with lack of integration of internationalfinancial markets. For German stocks, home prices are found to beinformationally more efficient than foreign prices. The informationalefficiency of French stock prices is comparable in the two markets whenFrankfurt traders can observe Paris preopening prices before the opening. Author Affiliation: (1) IDEI, Gremaq and CRG, Toulouse University, France (2) CRG, Toulouse University, France Article History: Registration Date: 04/10/2004

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). (Reprinted by permission of the publisher.)

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 order 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. (Reprinted by permission of the publisher.)

We analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures. Optimal financing 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. (Reprinted by permission of the publisher.)