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Equity Market Fragmentation and Capital Investment Efficiency

Author

Listed:
  • Wayne Landsman

    (Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, North Carolina 27514)

  • Jing Pan

    (Accounting Department, Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802)

  • Stephen Stubben

    (University of Utah, Salt Lake City, Utah 84112)

Abstract

This study examines how equity market fragmentation affects firms’ capital investment decisions. Recent empirical research finds that market fragmentation lowers trading costs and thus improves market quality. We examine whether this increase in market quality translates into greater revelatory price efficiency, where stock prices reveal with greater precision information to managers and/or creditors about firms’ investment opportunities. Consistent with this notion, our findings reveal that the association between capital investment and investment opportunities is increasing in market fragmentation. Additional evidence suggests that (a) market fragmentation increases revelatory price efficiency at least in part by encouraging information acquisition and informed trade by equity investors and (b) the more efficient stock prices inform both managers and creditors about firms’ investment opportunities. Inferences based on difference-in-differences and instrumental variable tests are consistent with those based on our primary findings.

Suggested Citation

  • Wayne Landsman & Jing Pan & Stephen Stubben, 2024. "Equity Market Fragmentation and Capital Investment Efficiency," Management Science, INFORMS, vol. 70(7), pages 4381-4406, July.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:7:p:4381-4406
    DOI: 10.1287/mnsc.2023.4905
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