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Does Financial Market Structure Affect the Cost of Raising Capital?

Published online by Cambridge University Press:  16 June 2020

James Brugler ,
Carole Comerton-Forde Open the ORCID record for Carole Comerton-Forde [Opens in a new window]  and
Terrence Hendershott
James Brugler
Affiliation:
University of Melbournejames.brugler@unimelb.edu.au
Carole Comerton-Forde*
Affiliation:
UNSW Business Schoolc.comerton-forde@unsw.edu.au
Terrence Hendershott
Affiliation:
University of California at Berkeleyhender@haas.berkeley.edu
*
c.comerton-forde@unsw.edu.au (corresponding author)
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Abstract

We provide evidence on market structure and the cost of raising capital by examining changes in market structure in U.S. equity markets. Only the Order Handling Rules (OHR) of the Nasdaq, the one reform that reduced institutional trading costs, lowered the cost of raising capital. Using a difference-in-differences framework relative to the New York Stock Exchange (NYSE) that exploits the OHR’s staggered implementation, we find that the OHR reduced the underpricing of seasoned equity offerings by 1–2 percentage points compared with a pre-OHR average of 3.6%. The effect is the largest in stocks with the largest reduction in institutional trading costs after the OHR.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 5 , August 2021 , pp. 1771 - 1808
Copyright
© The Author(S), 2020. Published By Cambridge University Press On Behalf Of The Michael G. Foster School Of Business, University Of Washington

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Footnotes

We thank Jeff Smith at the National Association of Securities Dealers Automated Quotations (Nasdaq) for assistance in understanding the implementation of the Nasdaq reforms. We also thank Jennifer Conrad (the editor), Antonio Gargano, Bruce Grundy, Frank Hatheway, Joel Hasbrouck, Ross Levine, Dan Li, Matt Ringgenberg, Kumar Venkataraman (the referee), Chen Yao; participants at the 2017 Financial Industry Regulatory Authority (FINRA) and Columbia University Market Structure Conference, the 2017 Australian National University (ANU) Research Summer Camp, the 2018 Financial Research Network (FIRN) Market Microstructure Meeting, the 2018 Central Bank Microstructure Meeting, and the 2017 National Bureau of Economic Research (NBER) Conference on Competition and the Industrial Organization of Securities Markets; and participants at seminars at Monash University and ANU for helpful comments. Comerton-Forde and Hendershott gratefully acknowledge support from the Norwegian Finance Initiative. Comerton-Forde is an economic consultant for the Australian Securities and Investments Commission, and Hendershott provides expert witness services to a variety of clients.

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