Dynamics of Trading Volume, Price, & Duration of Contractual Relationship
Date Issued
2001-12
Date
2001-12
Author(s)
DOI
20060927122730757256
Abstract
Agency theorists consider a firm as a nexus of contractual relationships. Contract-
ing parties such as shareholders, debt holders, managers, input suppliers, advertising
agencies & retailers may have information superior to outsiders concerning the firm's
quality. In this paper, we show that the duration of contractual relationship within
a firm has important implications on the dynamics of the price & trading volume
of the firm's stock. If the duration of information asymmetry corresponds to that of
contractual relationship, insiders with long-term relationship is shown to marginally
prefer less aggressive strategies of trading than those who can only access superior information temporarily. Such behavior makes it more diÆcult for the market maker
to infer the existence of informed traders. The market maker will henceforth provide
smaller bid-ask spreads, which attract discretionary liquidity traders to gather their
trades in that period.
With the long-term contractual relationship, uncertainty is resolved more slowly be-
cause the informed trader trades on his information advantage gradually. This strategy
enlarges the liquidity traders' loss & discourages them from holding the firm's stock.
We conclude that a firm's fundamental value will be influenced by its choice between
changing partners regularly & committing to a partner. From the viewpoints of the
firm & uninformed traders, changing partners regularly is always an optimal policy
under the topics of market eÆciency & information asymmetry.
Publisher
臺北市:國立臺灣大學財務金融學系
Type
report
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