1Please find Albert J. Menkveld at albertjmenkveld@gmail.com and Ting Wang at

How Do Designated Market Makers Create Value for Small-Caps? Firms care about stock liquidity as it affects their cost of capital. Small-caps care most as their stock exhibits lowest liquidity level and highest liquidity risk. Euronext allows them to contract with designated market makers (DMMs) who then have to supply minimum liquidity unconditionally. In Amsterdam, 74 small-cap firms sign up on the introduction day. We find that this improves liquidity level and reduces liquidity risk, both in an absolute sense and relative to non-DMM stocks. Moreover, it creates value as (i) DMM stocks enjoy an average abnormal return of 3.5 % around the announcement day and (ii) both level and risk changes explain the cross-sectional dispersion in abnormal returns. We further find that DMMs participate in more trades and their trading profit does not increase, yet is more volatile, at times of a high quoted spread, i.e. at times when they are likely to be constrained by their contract. Small-cap firms care about liquidity as their stocks exhibit lowest liquidity levels and highest liquidity risk. In their oft-cited paper, Amihud and Mendelson (1986) link liquidity level