How does an idiosyncratic shock to stock liquidity affect liquidity and efficiency in the markets for related stocks? Utilizing the unique feature that the second stage of a two-step spinoff greatly increases the free float of a public firm, we document strong evidence that the enhanced liquidity of spun-off firms spills over to their industry peers, increasing their liquidity. The improved liquidity induces greater pricing efficiency and larger institutional holdings in these stocks. Liquidity spillovers also lead to positive valuation spillovers. Our results concerning liquidity externality and its consequences have important implications for policymakers, regulators, and firm managers.
{"title":"Liquidity spillovers: Evidence from two-step spinoffs","authors":"Yakov Amihud , Sahn-Wook Huh , Avanidhar Subrahmanyam","doi":"10.1016/j.finmar.2025.101000","DOIUrl":"10.1016/j.finmar.2025.101000","url":null,"abstract":"<div><div>How does an idiosyncratic shock to stock liquidity affect liquidity and efficiency in the markets for related stocks? Utilizing the unique feature that the second stage of a two-step spinoff greatly increases the free float of a public firm, we document strong evidence that the enhanced liquidity of spun-off firms spills over to their industry peers, increasing their liquidity. The improved liquidity induces greater pricing efficiency and larger institutional holdings in these stocks. Liquidity spillovers also lead to positive valuation spillovers. Our results concerning liquidity externality and its consequences have important implications for policymakers, regulators, and firm managers.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 101000"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594472","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.100991
Danling Jiang , Baixiao Liu , Steven Chong Xiao
We examine how social norms measured by religiosity influence institutional investors’ willingness to lend stock and constrain short selling in the U.S. markets. We find that firms with blockholders located in higher religiosity areas are associated with lower supply and higher utilization of lendable shares, but are not related to the demand for stock borrowing. Short interest, utilization rates, and lending fees, when combined with high blockholder religiosity, are stronger negative predictors of future stock returns. Our findings suggest that the social norms of institutional investors serve as a source of limits to arbitrage, which hinders market efficiency through stock lending.
{"title":"Social norms and stock lending","authors":"Danling Jiang , Baixiao Liu , Steven Chong Xiao","doi":"10.1016/j.finmar.2025.100991","DOIUrl":"10.1016/j.finmar.2025.100991","url":null,"abstract":"<div><div>We examine how social norms measured by religiosity influence institutional investors’ willingness to lend stock and constrain short selling in the U.S. markets. We find that firms with blockholders located in higher religiosity areas are associated with lower supply and higher utilization of lendable shares, but are not related to the demand for stock borrowing. Short interest, utilization rates, and lending fees, when combined with high blockholder religiosity, are stronger negative predictors of future stock returns<span>. Our findings suggest that the social norms of institutional investors serve as a source of limits to arbitrage, which hinders market efficiency through stock lending.</span></div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 100991"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594627","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.100988
Mario Bellia , Kim Christensen , Aleksey Kolokolov , Loriana Pelizzon , Roberto Renò
We study the trading activity of designated market makers (DMMs) in electronic markets using a unique dataset with audit-trail information on trader classification. DMMs may either adhere to their market-making agreements and offer immediacy during periods of heavy selling pressure, or they might lean-with-the-wind to profit from private information. We test these competing theories during extreme (downward) price movements, which we detect using a novel methodology. We show that DMMs provide liquidity when the selling pressure is concentrated on a single stock, but consume liquidity (leaving liquidity provision to slower traders) when several stocks are affected.
{"title":"Do designated market makers provide liquidity during downward extreme price movements?","authors":"Mario Bellia , Kim Christensen , Aleksey Kolokolov , Loriana Pelizzon , Roberto Renò","doi":"10.1016/j.finmar.2025.100988","DOIUrl":"10.1016/j.finmar.2025.100988","url":null,"abstract":"<div><div>We study the trading activity of designated market makers (DMMs) in electronic markets using a unique dataset with audit-trail information on trader classification. DMMs may either adhere to their market-making agreements and offer immediacy during periods of heavy selling pressure, or they might lean-with-the-wind to profit from private information. We test these competing theories during extreme (downward) price movements, which we detect using a novel methodology. We show that DMMs provide liquidity when the selling pressure is concentrated on a single stock, but consume liquidity (leaving liquidity provision to slower traders) when several stocks are affected.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 100988"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594470","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.101003
Lai T. Hoang , Marvin Wee , Joey Wenling Yang , Jing Yu
We examine how and why institutional investors trade differently around firms' negative environmental, social, and governance (ESG) news. We find that they reduce net purchases primarily after the ESG incidents. However, those with higher ESG preferences begin reducing their net purchases before the news breaks, likely to safeguard their ESG reputation and mitigate portfolios' ESG risk. Additionally, institutions’ net purchases decline before negative ESG news in firms with high levels of information asymmetry, leading to abnormal returns, indicating that these institutions are informed and trade in advance for financial gains. In contrast, retail investors appear largely insensitive to ESG incidents.
{"title":"Institutional trading and ESG controversies","authors":"Lai T. Hoang , Marvin Wee , Joey Wenling Yang , Jing Yu","doi":"10.1016/j.finmar.2025.101003","DOIUrl":"10.1016/j.finmar.2025.101003","url":null,"abstract":"<div><div>We examine how and why institutional investors trade differently around firms' negative environmental, social, and governance (ESG) news. We find that they reduce net purchases primarily after the ESG incidents. However, those with higher ESG preferences begin reducing their net purchases before the news breaks, likely to safeguard their ESG reputation and mitigate portfolios' ESG risk. Additionally, institutions’ net purchases decline before negative ESG news in firms with high levels of information asymmetry, leading to abnormal returns, indicating that these institutions are informed and trade in advance for financial gains. In contrast, retail investors appear largely insensitive to ESG incidents.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 101003"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594626","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.100989
Wenlian Lin , Jerry Cao , Yong Li
Market liquidity evaporation is often accompanied by heightened risk concerns among investors. We explore a threshold-based risk management strategy underlying this phenomenon, exploiting a unique feature in China's stock market where outside investors can observe whether blockholders of listed firms engage in share pledge financing. This transparency offers investors a clear threshold—the pledge day stock price—to monitor and assess the risks associated with share pledges. Using a regression discontinuity design, we find investors widely employ this threshold-based strategy; when the threshold is breached, they become increasingly cautious, reducing their liquidity provision, leading to a decline in market liquidity.
{"title":"Risk concerns and market liquidity: A regression discontinuity design","authors":"Wenlian Lin , Jerry Cao , Yong Li","doi":"10.1016/j.finmar.2025.100989","DOIUrl":"10.1016/j.finmar.2025.100989","url":null,"abstract":"<div><div>Market liquidity evaporation is often accompanied by heightened risk concerns among investors. We explore a threshold-based risk management strategy underlying this phenomenon, exploiting a unique feature in China's stock market where outside investors can observe whether blockholders of listed firms engage in share pledge financing. This transparency offers investors a clear threshold—the pledge day stock price—to monitor and assess the risks associated with share pledges. Using a regression discontinuity design, we find investors widely employ this threshold-based strategy; when the threshold is breached, they become increasingly cautious, reducing their liquidity provision, leading to a decline in market liquidity.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 100989"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594471","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-11-01DOI: 10.1016/j.finmar.2025.100990
Jianchun Sun, Shunming Zhang
We investigate the influence of probabilistic attitude, particularly the probabilistic optimism-pessimism, on trading behavior and market quality. The optimistic attitude leads traders to adventurously hold nonzero discontinuous investment positions, while the pessimistic attitude leads to limited participation. Probabilistic neutrality generates linear equilibrium with state-independent market quality. Optimistic and pessimistic markets exhibit nonlinear equilibria with contrasting features in price premiums, market depth, price impact, and reversed state-dependent traits in price skewness, price volatility, market liquidity, and price efficiency. Our results highlight a decisive role of probabilistic attitude in shaping markets.
{"title":"Trading behavior, asset price, and market quality: Based on probabilistic attitude","authors":"Jianchun Sun, Shunming Zhang","doi":"10.1016/j.finmar.2025.100990","DOIUrl":"10.1016/j.finmar.2025.100990","url":null,"abstract":"<div><div>We investigate the influence of probabilistic attitude, particularly the probabilistic optimism-pessimism, on trading behavior and market quality. The optimistic attitude leads traders to adventurously hold nonzero discontinuous investment positions, while the pessimistic attitude leads to limited participation. Probabilistic neutrality generates linear equilibrium with state-independent market quality. Optimistic and pessimistic markets exhibit nonlinear equilibria with contrasting features in price premiums, market depth, price impact, and reversed state-dependent traits in price skewness, price volatility, market liquidity, and price efficiency. Our results highlight a decisive role of probabilistic attitude in shaping markets.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"76 ","pages":"Article 100990"},"PeriodicalIF":2.1,"publicationDate":"2025-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145594473","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.finmar.2025.100983
Carole Comerton-Forde , Thomas Marta
High-frequency traders (HFTs) dominate secondary market trading in exchange-traded funds (ETFs) but do not engage in ETF arbitrage. By contrast, primary market arbitrageurs enforce the law of one price, but their activities are infrequent and limited by arbitrage costs. We find that primary market activity is associated with increased volatility and illiquidity in overweighted ETF constituent stocks, while HFT activity is linked to narrower bid–ask spreads. Using a quasi-natural experiment in Japan, we show that while ETF primary market activity can temporarily disrupt market quality, the liquidity benefits of secondary market trading ultimately outweigh these negative effects.
{"title":"ETF effects: The role of primary versus secondary market activities","authors":"Carole Comerton-Forde , Thomas Marta","doi":"10.1016/j.finmar.2025.100983","DOIUrl":"10.1016/j.finmar.2025.100983","url":null,"abstract":"<div><div>High-frequency traders (HFTs) dominate secondary market trading in exchange-traded funds (ETFs) but do not engage in ETF arbitrage. By contrast, primary market arbitrageurs enforce the law of one price, but their activities are infrequent and limited by arbitrage costs. We find that primary market activity is associated with increased volatility and illiquidity in overweighted ETF constituent stocks, while HFT activity is linked to narrower bid–ask spreads. Using a quasi-natural experiment in Japan, we show that while ETF primary market activity can temporarily disrupt market quality, the liquidity benefits of secondary market trading ultimately outweigh these negative effects.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"75 ","pages":"Article 100983"},"PeriodicalIF":2.1,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145005060","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.finmar.2025.100982
Corey Garriott , Vincent van Kervel , Marius Zoican
Limit order markets use a queuing system in which limit orders must wait in line to execute. We show that the queue position of a limit order influences its adverse selection risk and inhibits inventory risk management. Trade may worsen market maker risk sharing, unlike many protocols without queuing. We uncover a crowding-out effect: An inventory shock reduces liquidity provision by market makers later in the queue. Using futures data, we confirm both low risk sharing and the crowding-out effect. These two results imply a trade-off, as the queuing sequence that optimizes risk sharing decreases quoted depth up to 8.4%.
{"title":"Queuing and inventories in limit order markets","authors":"Corey Garriott , Vincent van Kervel , Marius Zoican","doi":"10.1016/j.finmar.2025.100982","DOIUrl":"10.1016/j.finmar.2025.100982","url":null,"abstract":"<div><div>Limit order markets use a queuing system in which limit orders must wait in line to execute. We show that the queue position of a limit order influences its adverse selection risk and inhibits inventory risk management. Trade may worsen market maker risk sharing, unlike many protocols without queuing. We uncover a crowding-out effect: An inventory shock reduces liquidity provision by market makers later in the queue. Using futures data, we confirm both low risk sharing and the crowding-out effect. These two results imply a trade-off, as the queuing sequence that optimizes risk sharing decreases quoted depth up to 8.4%.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"75 ","pages":"Article 100982"},"PeriodicalIF":2.1,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145005057","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.finmar.2025.100984
Lu Qin , Don M. Autore , Danling Jiang , Hongquan Zhu
We examine the impact of staggered high-speed rail (HSR) connection events between city pairs in China on retail investor behavior and stock market equilibrium outcomes. We find that HSR introductions between investor-firm city pairs promote intercity retail block purchases and cross-city web searches, and increase return comovement among firms in connected cities. Enhanced city connectivity is associated with improved firm valuation, increased turnover, better liquidity, and reduced prevalence of large trades. These effects tend to be driven by connected city pairs with a distance below 1,500 km, for which HSR is faster than flying.
{"title":"Faster than flying: High-speed rail, investors, and firms","authors":"Lu Qin , Don M. Autore , Danling Jiang , Hongquan Zhu","doi":"10.1016/j.finmar.2025.100984","DOIUrl":"10.1016/j.finmar.2025.100984","url":null,"abstract":"<div><div>We examine the impact of staggered high-speed rail (HSR) connection events between city pairs in China on retail investor behavior and stock market equilibrium outcomes. We find that HSR introductions between investor-firm city pairs promote intercity retail block purchases and cross-city web searches, and increase return comovement among firms in connected cities. Enhanced city connectivity is associated with improved firm valuation, increased turnover, better liquidity, and reduced prevalence of large trades. These effects tend to be driven by connected city pairs with a distance below 1,500 km, for which HSR is faster than flying.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"75 ","pages":"Article 100984"},"PeriodicalIF":2.1,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145005059","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2025-09-01DOI: 10.1016/j.finmar.2025.100985
Youngmin Choi , Suzanne S. Lee
We focus on the fundamental role of security analysts as information intermediaries using recent advances in the realized variance literature. We construct a signal-to-noise volatility ratio to examine the heterogeneity in the efficiency contributions of analysts’ recommendations while controlling for the noise contained in price data. We find that only analysts’ revisions with greater efficiency contributions generate significant stock price reactions in the directions expected by the analysts. Furthermore, these revisions increase the degree of informed trading in the options market and reduce the uncertainty related to the covered firms.
{"title":"On the efficiency contributions of analyst recommendations to financial markets","authors":"Youngmin Choi , Suzanne S. Lee","doi":"10.1016/j.finmar.2025.100985","DOIUrl":"10.1016/j.finmar.2025.100985","url":null,"abstract":"<div><div>We focus on the fundamental role of security analysts as information intermediaries using recent advances in the realized variance literature. We construct a signal-to-noise volatility ratio to examine the heterogeneity in the efficiency contributions of analysts’ recommendations while controlling for the noise contained in price data. We find that only analysts’ revisions with greater efficiency contributions generate significant stock price reactions in the directions expected by the analysts. Furthermore, these revisions increase the degree of informed trading in the options market and reduce the uncertainty related to the covered firms.</div></div>","PeriodicalId":47899,"journal":{"name":"Journal of Financial Markets","volume":"75 ","pages":"Article 100985"},"PeriodicalIF":2.1,"publicationDate":"2025-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"145005061","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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