Scandinavian Working Papers in Economics
UiS Working Papers in Economics and Finance,
University of Stavanger
No 2010/3: Why do firms pay for liquidity provision in limit order markets?
Johannes A Skjeltorp () and Bernt Arne Odegaard ()
Additional contact information
Johannes A Skjeltorp: Norges Bank
Bernt Arne Odegaard: University of Stavanger, Postal: University of Stavanger, NO-4036 Stavanger, Norway
Abstract: 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.
Keywords: Market microstructure; Corporate Finance; Designated Market Makers; Insider Trading
23 pages, April 28, 2010
Full text files
uis_wps_2010_3_skjeltorp_odegaard.pdf
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