TY - JOUR
T1 - How do Designated Market Makers Create Value for Small-Cap Stocks?
AU - Menkveld, A.J.
AU - Wang, T.
PY - 2013
Y1 - 2013
N2 - A poor liquidity level and a high liquidity risk significantly raise the required return for small-cap stocks. Euronext allows these firms to hire designated market makers (DMMs) who guarantee a minimum liquidity supply for a lump sum annual fee. In an event study based on 74 DMM stocks, we find that the contract improves liquidity level, reduces liquidity risk, and generates an average abnormal return of 3.5%. DMMs participate in more trades and incur a trading loss on high quoted-spread days (days when their constraint is likely to bind). Finally, DMMs reduce the size of pricing errors. © 2013 Elsevier B.V.
AB - A poor liquidity level and a high liquidity risk significantly raise the required return for small-cap stocks. Euronext allows these firms to hire designated market makers (DMMs) who guarantee a minimum liquidity supply for a lump sum annual fee. In an event study based on 74 DMM stocks, we find that the contract improves liquidity level, reduces liquidity risk, and generates an average abnormal return of 3.5%. DMMs participate in more trades and incur a trading loss on high quoted-spread days (days when their constraint is likely to bind). Finally, DMMs reduce the size of pricing errors. © 2013 Elsevier B.V.
U2 - 10.1016/j.finmar.2012.12.003
DO - 10.1016/j.finmar.2012.12.003
M3 - Article
SN - 1386-4181
VL - 16
SP - 571
EP - 603
JO - Journal of Financial Markets
JF - Journal of Financial Markets
IS - 3
ER -