Equity Market Fragmentation and Capital Investment Efficiency

61 Pages Posted: 3 Mar 2021 Last revised: 13 May 2022

See all articles by Wayne R. Landsman

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Jing Pan

Pennsylvania State University - Department of Accounting

Stephen Stubben

University of Utah

Date Written: May 1, 2022

Abstract

This study examines how equity market fragmentation affects firms’ capital investment decisions. Recent empirical research finds that market fragmentation lowers trading costs and thus improves market quality. We examine whether this increase in market quality translates into greater revelatory price efficiency, where stock prices reveal with greater precision information to managers and/or creditors about firms’ investment opportunities. Consistent with this notion, our findings reveal that the association between capital investment and investment opportunities is increasing in market fragmentation. Additional findings suggest that (a) market fragmentation increases revelatory price efficiency at least in part by encouraging information acquisition and informed trade by equity investors and (b) the more efficient stock prices inform both managers and creditors about firms’ investment opportunities. Inferences based on difference-in-differences and instrumental variable tests are consistent with those based on our primary findings.

Keywords: equity market fragmentation, capital investment

JEL Classification: G12, G31, O16

Suggested Citation

Landsman, Wayne R. and Pan, Jing and Stubben, Stephen, Equity Market Fragmentation and Capital Investment Efficiency (May 1, 2022). Available at SSRN: https://ssrn.com/abstract=3757751 or http://dx.doi.org/10.2139/ssrn.3757751

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Jing Pan

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Stephen Stubben (Contact Author)

University of Utah ( email )

1655 E. Campus Center
Salt Lake City, UT 84112
United States

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