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https://hdl.handle.net/2440/86179
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Type: | Journal article |
Title: | Investor protection, adverse selection, and the probability of informed trading |
Author: | Brockman, P. Chung, D. |
Citation: | Review of Quantitative Finance and Accounting, 2008; 30(2):111-131 |
Publisher: | Springer US |
Issue Date: | 2008 |
ISSN: | 0924-865X 1573-7179 |
Statement of Responsibility: | Paul Brockman, Dennis Y. Chung |
Abstract: | The purpose of this study is to investigate the relation between investor protection, adverse selection, and the probability of informed trading. Previous research has established a direct relation between investor protection and firm liquidity, measured by bid-ask spreads and depths. In this study, we test the hypothesis that adverse selection is the mechanism through which poor investor protection leads to higher costs of liquidity. The Hong Kong equity market provides a unique opportunity to compare adverse selection differences across distinct investor protection environments, holding constant the trading platform and currency. Using various bid-ask spread decomposition models and probability of informed trading estimates, we confirm the hypothesized relation between investor protection quality and adverse selection costs. These findings contribute to the literature by establishing one of the links in the chain connecting investor protection to firm valuation. |
Keywords: | D82 G10 |
Rights: | © Springer Science+Business Media, LLC 2007 |
DOI: | 10.1007/s11156-007-0049-4 |
Published version: | http://dx.doi.org/10.1007/s11156-007-0049-4 |
Appears in Collections: | Aurora harvest 2 Business School publications |
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