The effect of leverage on microstructure variables.
Item
-
Title
-
The effect of leverage on microstructure variables.
-
Identifier
-
AAI9946213
-
identifier
-
9946213
-
Creator
-
Rakotomavo, Michel.
-
Contributor
-
Adviser: Kishore Tandon
-
Date
-
1999
-
Language
-
English
-
Publisher
-
City University of New York.
-
Subject
-
Economics, Finance
-
Abstract
-
We study the impact of complete leverage on the microstructure characteristics of securities (i.e. the cost of trading and its components, inventory cost and adverse selection cost). We find that complete leverage increases the level of trade informativeness (a measure of adverse selection cost) and therefore the degree of information asymmetry. This result holds even when the effects of other variables such as size, insider concentration, institutional holdings and the number of noninsiders are taken into account. Additional evidence is obtained by examining both financial and operating leverages separately. We find that inventory costs are higher for firms with high leverage, although the link is not statistically significant. This result persists when we consider additional factors. We obtain a stronger relation when we substitute both financial and operating leverages for complete leverage. Using cumulative abnormal returns to measure overall trading cost, we find a strong link between leverage and this cost. A larger degree of complete leverage increases trading cost. Both degrees of financial and operating leverage, used jointly or independently, also raise the cost of trading. These results do not vary with the addition of other factors. When the effect of factors such as size, insider concentration, institutional holdings and the number of noninsiders is removed from our leverage measures, we still find an overall positive link between the residual leverages and microstructure characteristics (i.e. total risk, variance of pricing error, trade informativeness). Therefore, variables traditionally associated with microstructure do not fully reflect the effect of leverage.
-
Type
-
dissertation
-
Source
-
PQT Legacy CUNY.xlsx
-
degree
-
Ph.D.
