PhD Defence: Liquidity, Investors, and International Capital Markets

Even though the concept of liquidity has been extensively investigated in an asset pricing context, there is limited evidence of its broader role in corporate finance. In his dissertation entitled <link doctoral-programme phd-in-management phd-projects detail>Liquidity, Investors, and International Capital Markets, Dimitrios Vagias shows that liquidity conditions exert significant influence in the decision and the particular type of equity offering performed. His findings also suggest that the aforementioned effect is asymmetric and mainly driven by adverse liquidity shocks.

In his dissertation, Vagias argues that this is of particular importance for policy makers since it shows that negative externalities hindering the ability to trade can significantly limit the availability of financing options, and thus weigh negatively on economic activity. He also shows that market liquidity is beneficial in mitigating agency frictions in a large cross-section of banks, with operating efficiency increasing monotonically with the extend of trading in secondary markets. This finding bears particular importance in the current discussion of how to reform the financial sector since it implies that liquid markets can efficiently complement regulators in their oversight of banks.

Dimitrios addresses questions like “What are the broader implications of liquidity on international capital mobility?”, “How do liquidity shocks propagate across markets otherwise distant and what is the relative importance of different transmission mechanisms?”, “How does liquidity relate to market discipline?”, and “How can liquidity conditions affect the timing and type of equity offerings?” by introducing a global macro perspective. His goal is to build a better understanding over liquidity’s broader implications in the decision-making process of investors, managers and regulators alike. As a result, his dissertation produces a number of interesting findings that lie at the heart of the academic debate over the importance of liquidity on the efficient allocation of capital in modern financial markets.

Dimitrios defended his dissertation on Friday 18 October 2013. His supervisor was <link people mathijs-van-dijk>Mathijs van Dijk, Professor of Financial Markets at RSM. Other members of the Doctoral Committee included Professors George Constantinides (Univeristy of Chicago Booth), Joost Driessen (Tilburg University), and <link people marno-verbeek>Marno Verbeek (Erasmus University Rotterdam).

About Dimitrios Vagias

Dimitrios Vagias (Greece, 1982) obtained his first degree in Electrical and Computer Engineering from the National Technical University of Athens (NTUA). Following the completion of his undergraduate studies (2005), he went to the U.S. to pursue graduate training and in 2008 he was awarded a Master of Science in Electrical Engineering from Columbia University (NY). In September 2008 he joined the Department of Finance of the Rotterdam School of Management (RSM, Erasmus University) as a PhD candidate. His main research interests are in the areas of international finance and empirical asset pricing, but also extend to banking and financial intermediation, financial decisions and capital structure, macroeconomics, and fixed income asset pricing. During his PhD studies, Dimitris has followed courses in several leading academic institutions including the University of Chicago, the Gerzensee study centre, the Barcelona Graduate School of Economics (GSE), and the CEMFI institute. In addition, he was able to present his work at several international conferences such as the EFA, the FMA Applied Finance Conference, the Infiniti Conference, the Multinational Finance Society meetings, the Global Finance Conference, the Erasmus Liquidity Conference, and the 10th Corporate Finance Day at Ghent. Dimitris has also presented his work in the internal seminars of the International Policy Analysis Division of the European Central Bank (ECB), and of the Research Division in the BoSpain. While pursuing his PhD, Dimitris has been involved in thesis supervision at both graduate and undergraduate level as well as in the teaching of several finance related courses. Starting from September 2013, Dimitris will be working at the ECB.

Abstract of Liquidity, Investors, and International Capital Markets

This dissertation consists of four empirical studies that seek to furnish a better understanding over liquidity’s broader implications in the decision-making process of investors, managers and regulators in international capital markets. Chapter 2 investigates the time-series as well as cross-sectional properties of the interaction between foreign equity flows and local liquidity conditions. Vagias’ findings suggest that foreign investors are less likely to aggravate adverse selection problems in financial markets that are more developed, and demonstrate higher levels of transparency. Chapter 3 shows that liquidity conditions play an important role in the decision to perform an equity offering. Moreover, his findings suggest that in imperfectly liquid markets, companies take into consideration the slope of the demand curve for their stock when deciding upon the type of an equity offering. Chapter 4 shows that banks subject to more intense monitoring by equity markets operate closer to the efficient frontier and are thus able to generate more value from their investments. It also shows that the liquidity effects is significantly more pronounced in the case of banks that are more susceptible to principal-agent type of conflicts. Chapter 5 investigates the extent of clustering of adverse liquidity shocks within and across particular geographic regions. Vagias documents that liquidity contagion is more pronounced in “high” rather than “low quality” stocks. Finally, he shows that cross-border portfolio investment can aggravate the clustering of negative liquidity shocks across markets that benefit disproportionately from such flows.

Photos: Chris Gorzeman / Capital Images