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The Effects of Market Fragmentation Around Corporate Events

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The Effects of Market Fragmentation Around Corporate Events University of Mississippi eGrove Electronic Theses and Dissertations Graduate School 2019 The Effects of Market Fragmentation Around Corporate Events Justin Steven Cox University of Mississippi Follow this and additional works at: https://egrove.olemiss.edu/etd Part of the Finance Commons Recommended Citation Cox, Justin Steven, "The Effects of Market Fragmentation Around Corporate Events" (2019). Electronic Theses and Dissertations. 1565. https://egrove.olemiss.edu/etd/1565 This Dissertation is brought to you for free and open access by the Graduate School at eGrove. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of eGrove. For more information, please contact [email protected]. THE EFFECTS OF MARKET FRAGMENTATION AROUND CORPORATE EVENTS JUSTIN COX A DISSERTATION PRESENTED IN PARTIAL FULFILLMENT OF REQUIREMENTS FOR THE DEGREE OF DOCTORATE OF PHILOSOPHY IN BUSINESS ADMINISTRATION, DEPARTMENT OF FINANCE, UNIVERSITY OF MISSISSIPPI MAY 2019 Copyright Justin Cox 2019 ALL RIGHTS RESERVED ABSTRACT In Part 1, I investigate the effects of market fragmentation in the liquidity formation of initial public offerings (IPOs). Recent exchange officials cite increases in market fragmentation as a hindrance to the liquidity formation in IPO trading. We find that IPOs are less fragmented at the start of IPO trading relative to later periods in the IPO secondary market. We also discover that more underpriced issues experience greater fragmentation, both lit and dark, at the start of IPO trading. Our study also examines the level of undisplayed liquidity in IPOs, finding more hidden trading at the start of IPO trading and in more underpriced issues. Finally, we provide evidence that algorithmic, hidden, and lit fragmented trading improve offering day IPO liquidity. In Part 2, I use the current fragmented market structure to test and an update theoretical limit order models on trading aggressiveness and order submissions around liquidity deadlines such as a stock’s ex- dividend date. We use a stock’s ex-dividend date as a deadline for liquidity traders to examine if dividend-seeking traders use dark and/or taker-maker venues as these two venues allow traders to bypass waiting costs and spread constraints to capture dividends. Our evidence indicates that taker-maker (dark) venue market share decreases (increases) on cum-dividend days, reverting once the stock trades ex-dividend. In Part 3, I use off-exchange retail trading data to examine the relevance of stock splits in attracting retail participation. Historically, stock splits help align prices in an optimal price range, resulting in disperse ownership and greater retail investor participation. We cite Minnick and Raman’s (2014) contention that changes in direct retail ownership contribute to the decline in stock splits. We provide an empirical analysis of retail ii trading around stock splits, forward and reverse. Our results indicate a transitory increase (decrease) in both retail trading and retail trading imbalances around forward (reverse) splits. Our results cast doubt on the optimal price range hypothesis in that stock splits align prices to an optimal range and confirm the declining significance of stock splits in attracting permanent retail ownership. iii DEDICATION This dissertation is dedicated to my wife, Laura, for being my greatest supporter and friend throughout this process, and to my parents for always supporting me and instilling a strong desire to succeed. iv ACKNOWLEDGEMENTS I wish to thank Dr. Robert Van Ness for serving as my dissertation committee chairperson and for his advice and guidance throughout the PhD program. I would also like to thank the other members of my committee, Dr. Bonnie Van Ness, Dr. Kathleen Fuller, and Dr. Paul Johnson for their help and support through this process. I also offer a large and genuine thanks to the entire the finance faculty at the University of Mississippi for their support during my time in the PhD program. Finally, I wish to thank my fellow PhD students, past and present, for providing me the best environment possible for me to grow as a student. v TABLE OF CONTENTS The Effects of Market Fragmentation Around Corporate Events ..................................................... i Acknoweldgement of Copyright Abstract ............................................................................................................................................ ii Dedication ....................................................................................................................................... iv Acknowledgements .......................................................................................................................... v Table of Contents ............................................................................................................................. v Lists of Appendices........................................................................................................................ vii Part 1: The Dark Side of IPOs: Examining Where and Who Trades in ........................................... 1 the IPO Secondary Market ............................................................................................................... 1 Introduction ......................................................................................................................... 2 Hypothesis Development .................................................................................................... 8 Data and Methods ............................................................................................................. 15 Results ............................................................................................................................... 18 Conclusion ........................................................................................................................ 35 List of References ............................................................................................................. 37 Appendix ........................................................................................................................... 42 Part 2: Where Does Ex-Dividend Trading Occur: A Pecking Order of Trading Venues Explanation of Dividend Capture .................................................................................................. 79 Introduction ....................................................................................................................... 80 Literature Review ............................................................................................................. 87 Hypothesis Development .................................................................................................. 89 Data And Methods ............................................................................................................ 97 Results ............................................................................................................................. 100 Robustness ...................................................................................................................... 108 Conclusion ...................................................................................................................... 117 List Of References .......................................................................................................... 119 Appendix ......................................................................................................................... 124 Part 3: Stock Splits and Retail Trading ........................................................................................ 153 Introduction ..................................................................................................................... 154 vi Hypothesis Development ................................................................................................ 159 Measures and Methods ................................................................................................... 163 Empirical Results ............................................................................................................ 167 Conclusion ...................................................................................................................... 178 List of References ........................................................................................................... 179 Appendix ......................................................................................................................... 183 Vita............................................................................................................................................... 216 vii LISTS OF APPENDICES PART 1: THE DARK SIDE OF IPOS: EXAMINING WHERE AND WHO TRADES IN THE IPO SECONDARY MARKET Sample Selection ............................................................................................................... 43 Sample Distribution .......................................................................................................... 45 Offering Day Trading Statistics By Underpricing ............................................................ 47 Lit Fragmentation in the IPO Secondary Market .............................................................. 49 Lit Fragmentation and IPO Underpricing ......................................................................... 51 Dark and Hidden
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