Firm Characterisitcs as Cross-Sectional Determinants of Adverse Selection

Abstract

We analyze the role of firm characteristics and ownership structure in determining the extent of adverse selection and therefore liquidity in securities markets. Firm characteristics and ownership structure appear to be contributing factors to the extent of adverse selection costs. After controlling for the effects of the well-established determinants of adverse selection, we find that a firm's ratio of plant, property, and equipment to total book assets, public utilities, and the number of financial institutions owning equity have additional explanatory power. To the extent that these variables are reasonable proxies for the firm's opaqueness of assets, regulatory environment, and ownership structure, we assert these factors contribute to the adverse selection cost of transacting for our sample of NYSE listed S&P 500 firms.

JEL Classification: G1, G3