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https://hdl.handle.net/2142/85511
Description
Title
Two Essays on Financial Economics
Author(s)
Lee, Tuckchung
Issue Date
2001
Doctoral Committee Chair(s)
Bernhardt, Daniel
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Theory
Language
eng
Abstract
"The thesis presented here is a collection of two self-contained papers on financial economics. The first chapter introduces methodologies and main findings in those two papers. Chapter two presents the paper entitled ""Eighthing and Hidden Limit Orders"". It explores how strategic traders can exploit the implicit inelastic demand in large limit orders by submitting their own limit orders that offer (generally) one tick price improvement, and then using the large limit order as an option: if the eighther's order is executed and the security value moves unfavorably, the eighther can reverse his position to the large limit order trader. To reduce this eighthing, the large limit order trader may hide a portion of his limit order. The hidden portion loses time priority and might discourage the liquidity traders in the opposite position, but reduces the magnitude of eighthing, by decreasing the expected option value of reversing the position. This paper explores the optimal choice of the large limit order trader between open-all order submission strategy and hidden order submission strategy. A large limit buy order trader finds hidden orders more attractive as the liquidity trade becomes less patient, tick size falls, asset value volatility declines, or the depth of late arriving limit orders at the same price falls. Chapter three presents the paper entitled ""Dividend Signaling: Fact or Fiction?"". It tests dividend signaling hypothesis using U.S. stock market data. The paper re-explores the ""Bang-for-the-buck"" prediction of dividend signaling hypotheses, first identified by Bernheim and Wantz (1995), that the marginal market response to a dividend increase should be greater when the marginal cost of signaling is higher. We find a host of distinct results that are inconsistent with dividend signaling theory: (1) As the tax burden on dividends relative to capital gain rises, the marginal market response to dividend changes does not rise at either the mean or median of the conditional distribution of cumulative abnormal returns; (2) there is no consistent pattern of ""Bang-for-the-buck"" over the distinct tax regimes as predicted in dividend signaling hypothesis; (3) ""Bang-for-the-buck"" are often smaller for the financially distressed firms in distinct tax regimes, which is against dividend signaling theory."
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