Three essays in the impact of financial market structure on corporate decisions and price efficiency

This thesis summarizes my research works in the impact of financial market structure on corporate decisions and price efficiency. The first chapter of this thesis studies the market structure of direct listing (DL) and the economic consequences of initiating DLs into an IPO-only going-public market. A DL unbundles underwriting and capital-raising in the going-public process. This paper shows that initiations of U.S. DLs have spillover effects that reduce underpricing costs in the IPO market, particularly for firms less subject to informational frictions. DL caters to later-stage firms’ desire for public trading at lower costs: compared with IPO firms, DL firms are larger and older, incur lower underpricing costs, grow more slowly, and exhibit better long-run performance. The results suggest that the U.S. DL innovations reduce intermediary market power in both the DL and IPO markets and improve public market access for later-stage firms. The second chapter, coauthored with Xiongshi Li and Mao Ye, analyzes the impact of regulatory constraints and market-structure frictions on share repurchases. To prevent issuers from inflating their share prices, SEC Rule 10b-18 sets price ceilings on share repurchases through open markets. We find that market-structure reforms in the 1990s and 2000s dramatically increased share repurchases because they relaxed constraints on issuers competing with other buyers under price ceilings. The Tick Size Pilot Program, a controlled experiment that partially reversed previous reforms, significantly reduced share repurchases. Therefore, price ceilings and reduced market-structure frictions provide one explanation for the secular increase in share repurchases over dividends. Meanwhile, these two frictions always exist, which explains why share repurchases have not crowded out dividends entirely. The third chapter, coauthored with Mao Ye and Wei Zhu, studies the impact of market structure on investment-q sensitivity. The paper is published in the Journal of Accounting and Economics (available at https://www.sciencedirect.com/science/article/pii/S0165410122000386). We find that a larger tick size increases a firm’s investment sensitivity to stock prices, suggesting that managers glean more new information from stock prices to guide their investment decisions as the tick size increases. Consistently, we also find that changes in managerial beliefs, as reflected in adjustments of forecasted capital expenditures, respond more strongly to market feedback under a larger tick size. Additional evidence suggests the following mechanism through which tick size affects managerial learning: a larger tick size reduces algorithmic trading, in turn encouraging fundamental information acquisition. Increased fundamental information acquisition generates incremental information about growth opportunities, macroeconomic factors, and industry factors, with respect to which the market has a comparative information advantage over management. These three chapters, combined with an article coauthored with Sida Li and Mao Ye that studies the evolution of order types in the stock exchanges (published in the Journal of Financial Economics, available at https://www.sciencedirect.com/science/article/pii/S0304405X22002306) and a paper coauthored with Jessica Bai and Angela Ma that studies the economic rationale of the SPAC market (available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3746490), constitute my research works during my Ph.D. studies.

Name thesis:degree_name

Ph.D.

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Finance

Grantor

University of Illinois at Urbana-Champaign

Year dc:date

2023

Author dc:creator

• Zheng, Yongjian (Miles)

Contributors dc:contributor

• Ye, Mao
• Almeida, Heitor
• Pennacchi, George
• Wu, Yufeng

• Market Structure
• Corporate Finance
• Regulation
• Price Efficiency

Statement dc:rights

• Copyright 2023 Yongjian (Miles) Zheng

Language dc:language

en, eng

Handle dc:identifier

https://hdl.handle.net/2142/120255

OAI record oai:identifier

https://www.ideals.illinois.edu/oai-pmh?verb=GetRecord&metadataPrefix=etdms&identifier=oai%3Awww.ideals.illinois.edu%3A2142%2F120255