Informational Efficiency and Liquidity Premium as the Determinants of Capital Structure

2010 ◽  
Vol 45 (2) ◽  
pp. 401-440 ◽  
Author(s):  
Chun Chang ◽  
Xiaoyun Yu
Keyword(s):  
Capital Structure ◽  
Information Acquisition ◽  
Operating Efficiency ◽  
Informational Efficiency ◽  
Information Revelation ◽  
Security Prices ◽  
Liquidity Premium ◽  
Maximum Information ◽  
Informed Traders ◽  
Operating Decisions

AbstractThis paper investigates how a firm’s capital structure choice affects the informational efficiency of its security prices in the secondary markets. We identify two new determinants of a firm’s capital structure policy: the liquidity (adverse selection) premium due to investors’ anticipated losses to informed trading, and operating efficiency improvement due to information revelation from the firm’s security prices. We show that the capital structure decision affects traders’ incentives to acquire information and subsequently, the distribution of informed traders across debt and equity claims. When information is less imperative for improving its operating decisions, a firm issues zero or negative debt (i.e., holding excess cash reserves) in order to reduce socially wasteful information acquisition and the liquidity premium associated with it. When information is crucial for a firm’s operating decisions, the optimal debt level is one that achieves maximum information revelation at the lowest possible liquidity cost. Our model can explain why many firms consistently hold no debt. It also provides new implications for financial system design and for the relationship among leverage, liquidity premium, profitability, and the cost of information acquisition.

Dark Pool Trading and Information Acquisition

2021 ◽  
Author(s):  
Jonathan Brogaard ◽  
Jing Pan
Keyword(s):  
Information Acquisition ◽  
Stock Price ◽  
Earnings Announcements ◽  
Algorithmic Trading ◽  
Price Dynamics ◽  
Pilot Program ◽  
Informational Efficiency ◽  
Tick Size ◽  
Dark Pool ◽  
Dark Pools

Abstract Theory suggests that dark pools may facilitate or discourage information acquisition. We find that more dark pool trading leads to greater information acquisition. We measure information acquisition using stock price dynamics around earnings announcements. To overcome endogeneity concerns, we exploit a large exogenous decrease to dark pool trading that results from the implementation of the Security and Exchange Commission’s (SEC’s) Tick Size Pilot Program. The results cannot be explained by lit venue liquidity, algorithmic trading, or informational efficiency. A battery of additional tests, such as documenting a shift in SEC EDGAR searches, supports the information acquisition interpretation.

scholarly journals MARKET STRUCTURE, SECURITY PRICES, AND INFORMATIONAL EFFICIENCY

1997 ◽  
Vol 1 (1) ◽  
pp. 169-205 ◽  
Author(s):  
JENNIFER HUANG ◽  
JIANG WANG
Keyword(s):  
Market Structure ◽  
Private Information ◽  
Equity Premium ◽  
Price Volatility ◽  
Securities Market ◽  
Informational Efficiency ◽  
Derivative Securities ◽  
Security Prices ◽  
Market Structures

We consider an economy with an incomplete securities market and heterogeneously informed investors. Each investor trades in the market to hedge the risk to his endowment and to speculate on future security payoffs using his private information. We examine the efficiency of the securities market in allocating risk and transmitting information under different market structures, as defined by the set of securities traded in the market. We show that the introduction of derivative securities can decrease the market's efficiency in revealing information on security payoffs, and increase the equity premium and price volatility in the market.

scholarly journals Who Acquires Information in Dealer Markets?

2020 ◽  
Vol 110 (4) ◽  
pp. 1145-1176
Author(s):  
Jesper Rüdiger ◽  
Adrien Vigier
Keyword(s):  
Information Acquisition ◽  
Price Discovery ◽  
Market Liquidity ◽  
Strategic Complementarity ◽  
Market Makers ◽  
Dealer Markets ◽  
Informed Traders ◽  
The Cost ◽  
Equilibrium Pattern

We study information acquisition in dealer markets. We first identify a one-sided strategic complementarity in information acquisition: the more informed traders are, the larger market makers’ gain from becoming informed. When quotes are observable, this effect in turn induces a strategic complementarity in information acquisition amongst market makers. We then derive the equilibrium pattern of information acquisition and examine the implications of our analysis for market liquidity and price discovery. We show that increasing the cost of information can decrease market liquidity and improve price discovery. (JEL O82, O83, G14)

scholarly journals The performance of newly privatized firms: The case of Portugal

2012 ◽  
Vol 1 (2) ◽  
pp. 92-125
Author(s):  
José Manuel Bernardo Vaz Ferreira
Keyword(s):  
Capital Structure ◽  
Economic Activity ◽  
Capital Investment ◽  
Operational Performance ◽  
Operating Efficiency ◽  
Activity Levels ◽  
Partial Privatization ◽  
Financial Health ◽  
Privatized Firms ◽  
Public Share

The aim of this study is to investigate the pre and post privatization financial, social and operational performance of forty two Portuguese companies in most of sectors of economic activity that experience full or partial privatization through public share offering, direct sale or public contest, for the period from 1989 to 2009. That is, this work investigates, whether or not, the privatization of sate-owned enterprises (SOE’s) had caused improvements on the economic and financial health of those privatized companies, as it is suggested by the literature of property rights, public choice and agency theory. First, we document significant improvements on profitability, operating efficiency, capital investment, real output, dividend payout, treasury applications, activity levels and capital structure. Secondly, we experience significant decreases in employment after privatization. Third, we observe that, following privatization, the financial equilibrium (short and long) of firms was negatively affected. Lastly, our results are generally robust surviving the partition of the dataset into various sub-samples.

scholarly journals Trading in the Presence of Short-Lived Private Information: Evidence from Analyst Recommendation Changes

2018 ◽  
Vol 53 (4) ◽  
pp. 1509-1546 ◽  
Author(s):  
Ohad Kadan ◽  
Roni Michaely ◽  
Pamela C. Moulton
Keyword(s):  
Private Information ◽  
Information Acquisition ◽  
Trading Strategies ◽  
Data Set ◽  
Liquidity Provision ◽  
Information Models ◽  
Trading Patterns ◽  
Informed Traders ◽  
Theoretical Predictions ◽  
Informational Advantage

We use a proprietary data set to test the implications of several asymmetric information models on how short-lived private information affects trading strategies and liquidity provision. Our identification rests on information acquisition before analyst recommendations are publicly announced. We provide the first empirical evidence supporting theoretical predictions that early-informed traders “sell the news” after “buying the rumor.” Further, we find distinct profit-taking patterns across different classes of institutions. Uninformed institutions, but not individuals, emerge as de facto liquidity providers to better-informed institutions. Placebo tests confirm that these trading patterns are unique to situations in which some investors have a short-lived informational advantage.

scholarly journals Asymmetric Information and Legislative Rules: Some Amendments

2001 ◽  
Vol 95 (2) ◽  
pp. 435-452 ◽  
Author(s):  
Vijay Krishna
Keyword(s):  
Asymmetric Information ◽  
Information Acquisition ◽  
Informational Efficiency ◽  
Efficiency Gains

We reexamine the major tenets of the informational theory of legislative rules, focusing on the informational efficiency of rules with varying degrees of restrictiveness. When committees are heterogeneous, full efficiency is attainable under the unrestrictive open rule as well as the somewhat restrictive modified rule. In contrast, the restrictive closed rule always leads to inefficiencies. When committees are homogeneous, the situation is different. All equilibria are inefficient regardless of legislative rules, but the closed rule leads to greater informational efficiency than does the open rule. Furthermore, the efficiency gains under the closed rule more than offset distributional losses regardless of the degree of preference divergence. We also examine the incentives provided by the different rules for information acquisition and committee specialization.

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