Why Do Listed Firms Pay for Market Making in Their Own Stock? by Bernt Ødegaard, Johannes Skjeltorp :: SSRN

Why Do Listed Firms Pay for Market Making in Their Own Stock? by Bernt Ødegaard, Johannes Skjeltorp :: SSRN:

" A recent innovation in equity markets is the introduction of market maker services paid for by the listed companies themselves. We investigate why firms are willing to pay a cost to improve the secondary market liquidity of their shares. We show that a contributing factor in this decision is the likelihood that the firm will interact with the capital markets in the near future, either because they have capital needs, or that they are planning to repurchase shares. We also find significant reductions in liquidity risk and cost of capital for firms that hire a market maker."

a look-in gives a better summary:

"In several electronic limit order markets, market participants have appeared with promises to maintain an orderly market in a particular stock, for example by keeping the spread at or below some agreed upon maximum. The innovation of these Designated Market Makers (hereafter DMMs) is that they charge a fee to the firm that has issued the equity to keep an orderly market in the firm's stock.
DMMs have appeared in several countries such as the Netherlands, France, Germany and Sweden. The DMM introductions have been studied for all these markets, where the main question examined is whether liquidity improves following the initiation of DMM agreements. A consensus finding in this research is that liquidity improves...."

I did not know this. It will definitely make its way to class!

Cite: Ødegaard, Bernt Arne and Skjeltorp, Johannes Atle, Why Do Listed Firms Pay for Market Making in Their Own Stock? (October 20, 2011). Paris December 2011 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: http://ssrn.com/abstract=1944057