UiS Working Papers in Economics and Finance,
University of Stavanger

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

JEL-codes: G10; G20

23 pages, April 28, 2010

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Johannes A Skjeltorp and Bernt Arne Odegaard, 'Why do firms pay for liquidity provision in limit order markets?', Financial Management

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