What’s wrong with Pittsburgh? Delegated investors and liquidity concentration |
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| Authors: | Andra C Ghent |
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| Institution: | 1. Oslo Metropolitan University, Oslo Business School, Pilestredet 46, Oslo 0130, Norway;2. The Arctic University of Norway, Hansine Hansens veg 18, Tromsø N-9019, Norway;3. Department of Banking and Finance, Monash University, 900 Dandenong Rd., Caulfield East VIC 3145, Australia;1. Harvard Business School, United States;2. Princeton University, United States;1. Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA;2. Swiss Finance Institute at EPFL, Quartier UNIL-Dorigny, Extranef 213, Lausanne CH-1015, Switzerland;3. Carl H. Lindner College of Business, 2906 Woodside Drive, University of Cincinnati, Cincinnati, OH 45221, USA |
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| Abstract: | What makes an asset institutional quality? This paper proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, it documents differences in investor composition across US cities and shows that delegated investors concentrate their investments in cities with higher turnover. It then estimates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid, even when assets have identical cash flows. The paper provides evidence for clientele equilibria arising in frictional asset markets and suggests that a liquidity channel may explain divergent paths in city development. |
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