Liquidity, information, and financial crisis

This thesis consists of three stand-alone studies relating to liquidity, information, and the financial crisis. The first study examines how the measures of liquidity risk estimated over the period before the global financial crisis of 2008-2009 predict global stocks crisis performance. Results show that the stocks with higher pre-crisis returns sensitivity to the global market liquidity exhibit greater declines in price during the crisis. The evidence is consistent across emerging, developed, and global samples, and remains robust whether the percentage effective spread or the percentage quoted spread is used as a liquidity measure. Overall, this finding provides some additional insights to the question as to why a stocks exposure to a market-wide liquidity shock is a priced systematic risk factor.The second essay investigates whether institutional investors contribute to spreading liquidity risk during the global financial crisis of 2008-2009. This study finds that stocks with high pre-crisis institutional ownership significantly underperformed during the financial crisis period. More importantly, stocks which are sensitive to liquidity shocks and have a high pre-crisis exposure to institutional ownership exhibited even greater price decline. Further analyses show that the spread of liquidity risk by institutions is attributable to non-block holding investors and independent institutional investors, who are more likely to face liquidity constraints during a crisis. The third study investigates how a countrys institutional and information environment affect variation in firm-specific information relative to market-wide information in news produced by the media, as reflected in co-movement in news, and the consequence of news co-movement on the stock market. Three main findings are documented in this study. First, news at the firm level co-moves with market-wide news across sample countries. This result suggests that the information produced and provided to the market by the media has both firm-specific detail and market-wide content. Second, this study finds that high news co-movement is associated with a countrys opaqueness and poor institutional characteristics, indicating that less firm-specific information is available to the public in these countries. Finally, there is clear evidence that higher news co-movement leads to both greater co-movement in stock returns and higher co-movement in liquidity