Vladimir A. Gatchev

Stock Market Liquidity and Firm Dividend Policy

We provide evidence of a link between firm dividend policy and stock market liquidity. In the cross section, owners of less (more) liquid common stock are more (less) likely to receive cash dividends. Predictions of the proportion of dividend payers based on 1963–1977 cross-sectional estimates account for most of the declining propensity of firms to pay dividends as documented by Fama and French (2001). Furthermore, historic liquidity is an important determinant of dividend initiations and omissions. Finally, we show that sensitivity of firm value to aggregate liquidity declines after dividend initiations, suggesting that investors view stock market liquidity and dividends as substitutes.

The Role of Underwriter-Investor Relationships in the IPO Process

We find that in allocating initial public offerings (IPOs), underwriters favor institutions they have previously worked with. Regular investors benefit more than casual investors in IPOs through greater participation in underpriced issues. Relationship participation is more important in the distribution of IPOs with stronger demand, IPOs of less liquid firms, and deals by less reputable underwriters. Overall, our results are consistent with book-building theories of IPOs. Interestingly, for 1999–2000 we find that regular investors receive even more underpriced IPOs relative to previous years while we do not find evidence that they provide additional services in IPOs.

Institutional ownership, analyst following, and share prices.

We study the mutual relationships between institutional ownership, analyst following and share prices. We show that the pressure on firms to set lower share prices to attract analysts is attenuated by institutional monitoring. Our theory refutes the assumed causal relation between share price and institutional ownership, attributed to the share price–liquidity relation, and we show empirically that share prices and institutional ownership are positively related after controlling for liquidity. Our study provides a rationale for why better firms generally maintain higher share price levels, and offers new insights into the puzzling empirical linkages observed between nominal share price levels and firm fundamentals.