Stacey E. Jacobsen

The Empirical Analysis of Liquidity

We provide a synthesis of the empirical evidence on market liquidity. The liquidity measurement literature has established standard measures of liquidity that apply to broad categories of market microstructure data. Specialized measures of liquidity have been developed to deal with data limitations in specific markets, to provide proxies from daily data, and to assess institutional trading programs. The general liquidity literature has established local cross-sectional patterns, global cross-sectional patterns, and time-series patterns. Commonality in liquidity is prevalent. Certain exchange designs enhance market liquidity: a limit order book for high volume markets, a hybrid exchange for low volume markets, and multiple competing exchanges. Automatic execution increases speed, but increases spreads. A tick size reduction yields a large improvement in liquidity. Providing ex-post transparency to an otherwise opaque market dramatically improves liquidity. Opening up the limit order book improves liquidity. Regulatory reforms that increase the number of competitive alternatives, move toward linking them up, and level the playing field between exchanges improves liquidity. High-frequency traders trade in both a passive, liquidity-supplying manner and an aggressive, liquidity-demanding manner. Their overall impact improves both liquidity and price efficiency, but concerns remain regarding occasional trading glitches, order anticipation strategies, and latency arbitrage at the expense of slow traders. The liquidity and corporate finance literature provides abundant evidence that liquidity is beneficial in many corporate settings: liquidity increases the power of governance via exit, reduces the cost of governance via intervention, facilitates the entrance of informed traders who produce valuable information about the firm, enhances the effectiveness of equity-based compensation to managers, reduces the cost of equity financing, mitigates trading frictions investors encounter when trading in the market to recreate a preferred payout policy, and lowers the immediate transaction costs and subsequent liquidity costs for firms conducting large share repurchases. Further, the influence goes both ways. There is evidence that firms influence their own liquidity through a broad range of corporate decisions including internal governance standards, equity issuance form and pricing, share repurchases, acquisition targets, and disclosure timeliness and quality. The literature on liquidity and asset pricing demonstrates that both average liquidity cost and liquidity risk are priced, liquidity enhances market efficiency, and liquidity strengthens the arbitrage linkage between related markets. We conclude with directions for future research.

The Death of the Deal: Are Withdrawn Acquisition Deals Informative of CEO Quality?

To examine the market response to positive revelations of chief executive officer (CEO) quality, this study focuses on CEOs who withdraw acquisition bids when the price becomes increasingly expensive. Firms that withdrawal for price-related reasons earn higher withdrawal returns than firms that withdraw for other reasons. This relation is stronger when CEO uncertainty and discretion is high. CEOs unwilling to increase the offer price are less likely to be replaced and more likely to advance to a larger firm than a control group of CEOs. The finding that the market attaches value to CEO-specific information suggests that unobservable manager characteristics can meaningfully impact firm outcomes.

The Share Repurchase Announcement Puzzle: Theory and Evidence

A good type can separate itself from a bad type by giving a costly signal; the bad type will not mimic because the signal is costlier for the bad type. A good type can also separate itself from a bad type by attracting scrutiny; the bad type will not mimic because the bad type will not risk attracting scrutiny and being discovered. The contribution of this paper is to develop a simple model to find out which separation method will be used in the context of a firm signaling its value to a capital market. We then test the predictions of the model – costless signaling is more likely to be used by more ignored and more undervalued firms – using a data set that contains firms that employ costless signals (25% of firms that announce open market share repurchases do not do it) and firms that employ costly signals (75% of firms that announce open market share repurchases do it). The evidence in favor of the predictions of the model is surprisingly robust.

The death of the deal: Are withdrawn acquisition deals informative of CEO quality?.

To examine the market response to positive revelations of chief executive officer (CEO) quality, this study focuses on CEOs who withdraw acquisition bids when the price becomes increasingly expensive. Firms that withdrawal for price-related reasons earn higher withdrawal returns than firms that withdraw for other reasons. This relation is stronger when CEO uncertainty and discretion is high. CEOs unwilling to increase the offer price are less likely to be replaced and more likely to advance to a larger firm than a control group of CEOs. The finding that the market attaches value to CEO-specific information suggests that unobservable manager characteristics can meaningfully impact firm outcomes.

Can Deal Failure Be Predicted

We utilize a transaction-level measure of realized deal failure – impairment of acquisition goodwill – to examine whether acquirer value destruction is detected by the market at deal announcement. On average, acquirer announcement returns have moderate power in forecasting the probability and poor power in forecasting the magnitude of impairment. They also poorly forecast other ex-post symptoms of deal failure – CEO turnover, poor stock and operating performance, and distressed delisting. Detection is better for large, public target, and large acquirer transactions. Our evidence suggests that deal failure may be largely triggered by latent factors that are unknown at announcement. JEL Classification: G34, G14, G32, G02

Capital Commitment and Illiquidity in Corporate Bonds

We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank‐affiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank‐affiliated dealer capital to absorb customer imbalances, and that postcrisis banking regulations likely contribute.

Liquidity Measure Distortions in Fast Markets: Expensive and Cheap Solutions

We investigate how the increase in speed of U.S. equity markets has distorted liquidity measures. We find that the widely-used Monthly Trade and Quote (MTAQ) database yields a percent effective spread 43% higher than our benchmark, a quoted spread that is nonpositive nine times more often, and a potential cost of poor routing decisions of

Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions

8.4 Billion/year. We test ways to eliminate or mitigate these distortions. We find that the best solution is to use the expensive Daily Trade and Quote database. If a researcher is financially constrained, then the second best solution is to use MTAQ with our new Interpolated Time technique and two other techniques.