Financial Contagion and Market Liquidity: Evidence from the Asian Crisis

Models of financial crisis and contagion predict that an economic crisis turns into a crisis of market liquidity in the presence of borrowing constraints, information asymmetry and risk aversion. Based on the firm-level data on a sample of exposed and unexposed US stocks to the Asian currency crisis, we find a significant increase (decrease) in the crisis period bid-ask spreads (depth) and their volatilities for both the groups. While our results underscore the imprints of flight to quality, we detect little causal patterns in liquidity innovations. An important implication of our findings, as evidenced by the recent crisis, is that regulatory response to enhance liquidity during a crisis should not be limited to the industries and markets directly exposed to the crisis. Finally, we find that the deterioration in market liquidity provides a partial explanation for the crisis-induced abnormal returns

The waiting period of initial public offerings

The length of time it takes an IPO firm to go public (called ‘waiting period’) reflects multiple layers of scrutiny from underwriters, auditors, venture capitalists, institutional investors, and regulators. Accordingly, we show that the waiting period is a good barometer of ex ante uncertainty about future cash flows and that it has predictive power after the firm goes public. We find that firms marked by short waiting periods experience lower underpricing and less uncertainty and superior stock/operating performance in the aftermarket. We also report that smaller firms are taking longer to go public after SOX Act, thus providing justification for the 2012 JOBS Act

Discretionary loan loss provisioning and bank stock returns: The Role of economic booms and busts

We provide evidence that discretionary loan loss provisions (DLLP) convey value-relevant information to the market that is highly dependent upon the state of the economy. DLLP is associated with negative abnormal returns during bad economic states characterized by growing default concerns, but it is associated with significantly higher abnormal stock returns in good economic states, as banks relax underwriting standards and look to accelerate loan growth. Exploring the underlying link, we find that banks recording higher provisions during good times realize significantly higher earnings and loan growth in the subsequent year, whereas such banks experience further increases in non-performing loans following periods of distress. These findings are not driven by the 2008 financial crisis when investors responded even more negatively to DLLP. With new accounting standards requiring an even greater degree of subjective judgment, regulators should ensure the informativeness of bank loss reserves is preserved

Firm Characteristics as Cross-sectional Determinants of Adverse Selection

We analyze the role of firm characteristics in determining the extent of adverse selection, and therefore liquidity, in securities markets. After controlling for the effects of the well-established determinants of adverse selection, we find evidence that a firm's ratio of plant, property, and equipment to total book assets and its status as a public utility have additional explanatory power. To the extent that these variables are reasonable proxies for the firm's transparency of assets and regulatory environment, we assert these factors contribute to the adverse selection cost of transacting for our sample of NYSE listed S&P 500 firms. Copyright Blackwell Publishing Ltd, 2004.