Flow Toxicity and Bank Equity Holdings

55 Pages Posted: 6 Sep 2018

See all articles by Wei-Ling Song

Wei-Ling Song

Louisiana State University

Jianfeng Hu

Singapore Management University - Lee Kong Chian School of Business

Gary C. Sanger

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Jiun-Lin Chen

University of Adelaide; Financial Research Network (FIRN)

Date Written: August 30, 2018

Abstract

This paper investigates the market microstructure effects on client firms of equity holdings by relationship banks, i.e., lenders and/or underwriters, prior to the 2008 financial crisis. It intends to shed light on the need for “the Volcker Rule.” We find that banks’ equity holdings of corporate clients reduce flow toxicity and effective spreads surrounding earnings announcements. Such client firms also experience higher 3-day abnormal stock returns and better subsequent one-month stock performance. In contrast, firms with higher holdings by other independent institutional investors do not have robust lower flow toxicity and experience significantly lower abnormal returns during the 3-day and one month windows. The findings suggest that, on average, banks perform valuable market making services in the equity market and are compensated by modest profits.

Keywords: the Volcker Rule, bank market making, flow toxicity, market microstructure, bank equity holdings

JEL Classification: G21, G24, G28, G14, D82

Suggested Citation

Song, Wei-Ling and Hu, Jianfeng and Sanger, Gary C. and Chen, Jiun-Lin, Flow Toxicity and Bank Equity Holdings (August 30, 2018). Available at SSRN: https://ssrn.com/abstract=3243161 or http://dx.doi.org/10.2139/ssrn.3243161

Wei-Ling Song

Louisiana State University ( email )

Baton Rouge, LA 70803
United States
225-578-6258 (Phone)
225-578-6366 (Fax)

Jianfeng Hu (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
(+65) 68085477 (Phone)

Gary C. Sanger

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

2163 CEBA
Baton Rouge, LA 70803-6308
United States
225-578-6353 (Phone)
225-578-6366 (Fax)

Jiun-Lin Chen

University of Adelaide ( email )

No 233 North Terrace, School of Commerce
Adelaide, South Australia 5005
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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