The Journal of Finance

Liquidity Externalities and Adverse Selection: Evidence from Trading after Hours

Published: 03/25/2004   |   DOI: 10.1111/j.1540-6261.2004.00646.x

Michael J. Barclay, Terrence Hendershott

This paper examines liquidity externalities by analyzing trading costs after hours. There is less than 1/20 as many trades per unit time after hours as during the trading day. The reduced trading activity results in substantially higher trading costs: quoted and effective spreads are three to four times larger than during the trading day. The higher spreads reflect greater adverse selection and order persistence, but not higher dealer profits. Because liquidity provision remains competitive after hours, the greater adverse selection and higher trading costs provide a direct measure of the magnitude of the liquidity externalities generated during the trading day.

Negotiated Block Trades and Corporate Control

Published: 07/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03769.x

MICHAEL J. BARCLAY, CLIFFORD G. HOLDERNESS

We identify negotiated trades of large‐percentage blocks of stock as corporate control transactions. When a block trades and the firm is not fully acquired, cumulative abnormal returns average 5.6%, and 33% of the chief executives are replaced within a year. Stock‐price increases are larger when control passes to the new blockholder, when management does not resist the blockholder's effort to influence corporate policy, and when the block purchaser eventually fully acquires the firm. These findings suggest that the specific skills and expertise of blockholders, and not just the concentration of ownership, are important determinants of firm value.

Automation versus Intermediation: Evidence from Treasuries Going Off the Run

Published: 09/19/2006   |   DOI: 10.1111/j.1540-6261.2006.01061.x

MICHAEL J. BARCLAY, TERRENCE HENDERSHOTT, KENNETH KOTZ

This paper examines the choice of trading venue by dealers in U.S. Treasury securities to determine when services provided by human intermediaries are difficult to replicate in fully automated trading systems. When Treasury securities go “off the run” their trading volume drops by more than 90%. This decline in trading volume allows us to test whether intermediaries' knowledge of the market and its participants can uncover hidden liquidity and facilitate better matching of customer orders in less active markets. Consistent with this hypothesis, the market share of electronic intermediaries falls from 81% to 12% when securities go off the run.

The Priority Structure of Corporate Liabilities

Published: 07/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04041.x

MICHAEL J. BARCLAY, CLIFFORD W. SMITH

Most discussions of corporate capital structure effectively assume that all debt is the same. Yet debt differs by maturity, covenant restrictions, conversion rights, call provisions, and priority. Here, we examine priority structure across a sample of 4995 COMPUSTAT industrial firms from 1981 to 1991. We analyze the variation in the use of capital leases, secured debt, ordinary debt, subordinated debt, and preferred stock both as a fraction of the firm's market value and as a fraction of total fixed claims. Our evidence provides consistent support for contracting cost hypotheses, mixed support for tax hypotheses, and little support for the signaling hypothesis.

The Maturity Structure of Corporate Debt

Published: 06/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04797.x

MICHAEL J. BARCLAY, CLIFFORD W. SMITH

We provide an empirical examination of the determinants of corporate debt maturity. Our evidence offers strong support for the contracting‐cost hypothesis. Firms that have few growth options, are large, or are regulated have more long‐term debt in their capital structure. We find little evidence that firms use the maturity structure of their debt to signal information to the market. The evidence is consistent, however, with the hypothesis that firms with larger information asymmetries issue more short‐term debt. We find no evidence that taxes affect debt maturity.

Competition among Trading Venues: Information and Trading on Electronic Communications Networks

Published: 11/07/2003   |   DOI: 10.1046/j.1540-6261.2003.00618.x

Michael J. Barclay, Terrence Hendershott, D. Timothy McCormick

This paper explores the competition between two trading venues, Electronic Communication Networks (ECNs) and Nasdaq market makers. ECNs offer the advantages of anonymity and speed of execution, which attract informed traders. Thus, trades are more likely to occur on ECNs when information asymmetry is greater and when trading volume and stock‐return volatility are high. ECN trades have greater permanent price impacts and more private information is revealed through ECN trades than though market‐maker trades. However, ECN trades have higher ex ante trading costs because market makers can preference or internalize the less informed trades and offer them better executions.

Effects of Market Reform on the Trading Costs and Depths of Nasdaq Stocks

Published: 05/06/2003   |   DOI: 10.1111/0022-1082.00097

Michael J. Barclay, William G. Christie, Jeffrey H. Harris, Eugene Kandel, Paul H. Schultz

The relative merits of dealer versus auction markets have been a subject of significant and sometimes contentious debate. On January 20, 1997, the Securities and Exchange Commission began implementing reforms that would permit the public to compete directly with Nasdaq dealers by submitting binding limit orders. Additionally, superior quotes placed by Nasdaq dealers in private trading venues began to be displayed in the Nasdaq market. We measure the impact of these new rules on various measures of performance, including trading costs and depths. Our results indicate that quoted and effective spreads fell dramatically without adversely affecting market quality.