Liquidity and Firm Valuation

Question 1

Fang, Noe and Tice 2009

Answer 1

• Using decimilazation as an exogenous shock to liquidity,
• find that firms with liquid stocks have better performance as measured by M/B.
• Also find that liquidity increases the information content of market prices and of performance-sensitive managerial compensation.

Question 2

Hasbrouck 2009

Answer 2

• Using a Bayesian Gibbs approach, estimates effective transaction costs from daily data
• allows utilization of full CRSP tape that starts in 1926.
• Estimates from TAQ are limited to 1983+ Gibbs & TAQ estimates 95% correlated.
• Finds effective costs pos related to returns.
• Relation concentrated in January, but not driven by small firm effect.
• Results less supportive of liquidity risk effects.

Question 3

Lin, Singh and Yu 2009

Answer 3

• Mot: informed trade when info value > trading costs. Liq traders if improved pf alloc > trading costs ⇒ firms w/ trade free days have higher latent trading costs & lower liq
• Hyp: “trading continuity improvement hyp” firm mngrs facing trading discontinuity use splits to attract uninformed
• → allows mkt makers to reduce invty holding & adverse info costs → low trading cost & incr liq → prices less affected by mkt liq shocks
• Predicts: after splits lower liq risk → low req’d liq premium ⇒ lower cost of cap & incrd firm value
• Find: use LM12 (1) num trading days decr, liq risk mitigation, decr cost of cap (2) liq incr reduce cost of cap 17%

Question 4

Roll, Schwartz and Subrahmanyam 2009

Answer 4

• Options may affect firm val b/c they help complete mkts & stimulate informed trades.
• firms with more options trading have higher Tobin’s q
• Corp investment by firms with greater options trading more sensitive to stock prices.
• Options trading affects firm val more in stocks with greater info asymm.
• indicate options trading pos associated with firm val & info production