This thesis consists of three main empirical chapters on the effect of stock liquidity on exchange markets. The first (Chapter 2) investigates the pricing ability of an illiquidity measure, namely the Amihud measure (Amihud, 2002), in different sample periods. The second (Chapter 3) determines the causal link between two well-known market quality factors liquidity and idiosyncratic volatility adopting two-stage least squares methodology (2SLS). The last empirical chapter (Chapter 4) revisits the limits to arbitrage theory and studies the link between stock liquidity and momentum anomaly profit, employing the difference-in-differences approach. The overall contribution of this thesis is to employ causal techniques in the context of asset pricing in order to eliminate potential endogeneity problems while investigating the relation between stock liquidity and exchange markets. Chapter 2 investigates whether the Amihud measure is priced differently if the investor is optimistic or, conversely, pessimistic about the future of the stock markets. The results of the chapter show that Amihud measure is priced in the low-sentiment period and that there is illiquidity premium when investor sentiment is low. Chapter 3 studies whether a change in stock liquidity has an impact on idiosyncratic volatility, employing causal techniques. Prior studies investigate the link between liquidity and idiosyncratic volatility but none focus on the potential problem of reverse causality. To overcome this reverse causality problem, I use the exogenous event of decimalisation as an instrumental variable and employ two-stage least squares approach to identify the impact of liquidity on idiosyncratic volatility. The results of the chapter suggest that an increase in illiquidity causes an increase in idiosyncratic volatility. As an additional result, my study shows that reduction in the tick size as a result of decimalisation improves firm-level stock liquidity. Chapter 4 examines whether liquid stocks earn more momentum anomaly profits compare to illiquid stocks, using the implementation of different tick sizes for different price ranges in the American Stock Exchange (AMEX) between February 1995 and April 1997. This programme provides a plausibly exogenous variation to disentangle the endogeneity issue and allows me to examine the impact of liquidity on momentum, by clearly exploiting the difference-in-difference framework. The results of the chapter show that liquid stocks earn more momentum profit than illiquid stocks.

In this dissertation I reflect on business organizations, as ways to legally organize economic activities. In Chapter 1, I build on extant literature to define a theory of business organizations that is orthogonal and complementary to the theory of the firm. The central question this theory addresses is: What legal form should a firm take? I argue that the “property turn” that has characterized recent advancements in the theory of the firm has yet to fully take place in the theory of business organizations and attempt to make several steps in that direction. In particular, I show that a central issue for organizations is whether the capital provided by investors is committed for the long period or not. Different organizational forms are characterized by different levels of commitment. Historically, the enforceability of commitments to invest for the long was slow to be granted and involved politically-charged process. Once established, long-term commitment of capital unleashed a series of developments that are now well understood to characterize modern markets. In Chapter 2, I build on these ideas to propose a formal model of the commitment of capital for the long term. In the model, two organizational forms are contrasted: one with short-term capital (a “partnership”) and one with capital committed for the long term (a “corporation”). By starting from this basic difference, I show that a series of implications follow. In particular, investors in the corporation have to compensate the loss of liquidity entailed by the long-term commitment with a more liquid market for shares ex post. In turn, liquidity in the market depends endogenously on the degree of asymmetric information that characterizes trade. Thus, for the commitment of capital to be sustainable, shares have to be liquid, which in turn implies that shareholders need to be (in expectation) relatively uninformed so that outside (fully uninformed) investors do not demand too large a discount when purchasing their shares. This mechanism yields implications for the typical size of different organizational forms, with corporations faring better than partnerships in terms of share value when the number of equity holders is large, and vice versa when it is small. In addition, the separation between ownership and control in large corporations, which is typically seen with preoccupation, emerges endogenously from the model as a necessary feature that guarantees liquidity in the secondary market and, in turn, increases share value in the primary market. In Chapter 3, I apply the model to shed light on the regulation of exit. The commitment of financial resources to a project is essential for long-term investment but brings about both a loss of control and a loss of liquidity for investors. Therefore, investors are ordinarily given an exit option. In this chapter, I contrast three common ways to exit: tradability of one's equity position, liquidation rights and redemption rights. I show that they balance liquidity and control very differently. Large safe projects are better associated with tradability, because the risk of inefficient continuation is low and the market provides enough liquidity. Small risky projects are better associated with redemption rights, because they can sort inefficient liquidations from inefficient continuations. Liquidation rights are desirable when redemption rights fail because of high costs of capital or the risk of runs on the company's cash.

Thesis (Ph. D.)--West Virginia University, 2006. / Title from document title page. Document formatted into pages; contains v, 163 p. : ill. (some col.). Includes abstract. Includes bibliographical references.

none

Thesis (M.A.)--Guo li zheng zhi da xue. / Cover title. Reproduced from typescript. Includes bibliographical references.

Thesis (Ph. D.)--Florida State University, 2003. / Includes bibliographical references.

This dissertation consists of two empirical essays on investor behavior and liquidity variation. The results demonstrate the important role of investors in affecting liquidity. The first essay examines how the fluctuation in the aggregate stock market liquidity is related to investor sentiment. I find that the stock market is more liquid when investor sentiment is higher. This evidence is consistent with the theoretical prediction that higher investor sentiment increases stock market liquidity. The second essay investigates whether the cross-sectional differences in liquidity are affected by institutional ownership. I document that stocks with larger increases in the number of institutional investors are more liquid than other stocks. This result is consistent with the prediction that information competition among institutional investors increases stock liquidity. / text

Not available / text

No description available.

This dissertation consists of two papers. The first paper examines the propagation of firm-specific shocks as well as market-wide shocks between 1995-2003 using Treasury and corporate bond market data. It then tests the implications of previously proposed models of contagion. I find little support for the industry and counterparty structure hypothesis, suggesting that fundamentals do not generate contagion. Consistent with the information transmission, rebalancing, and liquidity-shock hypotheses, I find evidence of flight to quality during the event periods. However, in contrast to the prediction of the liquidity-shock channel, the corporate bond market, on average, seems to be more liquid during event periods (evidenced by higher trading volume, trading frequency, and mean bond age). Furthermore, there are no significant changes in the trading of assets with the low transaction costs, which is contrary to the rebalancing theory. These findings are more in favor of the correlated information channel as a means of inducing contagion.The second paper examines the effect of liquidity on corporate bond prices using the newly formed TRACE data set. In the spirit of Acharya and Pedersen's (2005) liquidity-adjusted capital asset pricing model (LCAPM), I examine the impact of multiple sources of risk on corporate bond prices. The results do not lend strong support for the existence of liquidity risk in the corporate bond market or for the LCAPM, especially when liquidity is captured using the trading frequency, trading volume, and turnover. Contrary to the predictions of the LCAPM, more illiquid portfolios do not have higher values for the three liquidity betas; betas that capture the commonality in liquidity with the market, the sensitivity in returns with the market-wide liquidity, and the liquidity sensitivity with the market returns. Furthermore, after running cross-sectional regressions I do not find strong evidence either for the validity of the model or that liquidity risk does matter for the corporate bond prices.