The impact of informed trading on corporate liquidity |
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| Institution: | 1. Department of Finance and Accounting, University of Tunis El Manar, Tunis, Tunisia;2. Department of Economics and Finance, Sultan Qaboos University, Muscat, Oman;3. Institute of Economics and International Trade, Pusan National University, Busan, Republic of Korea;4. Faculty of Business Administration, Bilkent University, Ankara, Turkey;5. Department of Economics, Pusan National University, 2, Busandaehak-ro 63beon-gil, Geumjeong-gu, Busan, 46241, Republic of Korea;1. IDYST, Faculty of Geosciences and Environment, University of Lausanne, Switzerland;2. CNR, Istituto di Metodologie per l’Analisi Ambientale, Tito, PZ, Italy |
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| Abstract: | The purpose of this paper is to analyze the impact of informed trading on corporate liquidity. Although theory posits an inverse relation between informed trading and firm liquidity, there is relatively little evidence on precisely how this relation is established or maintained. The trading model of Easley et al. (J. Finance 51 (1996) 1405) is employed to estimate the probability of informed trading and to identify specific days of informed trading using posterior probabilities. The results show that corporate liquidity, both in terms of spreads and depths, is a decreasing function of the probability of informed trading. The main finding is that spreads narrow and depths increase on actual information days even after controlling for variations in price, volume, and volatility. |
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