Abstract
The main purpose of this paper is to examine the relation between investor protection the resiliency of stock market liquidity. We define resiliency as the willingness of market participants to submit limit orders following liquidity shocks. We posit that market makers and investors are more willing to submit limit orders when they are reasonably confident that liquidity shocks are not the result of insider trading. Such confidence is directly related to the level of investor protection to which the companies in question are subjected. Using a unique institutional setting, we confirm that the liquidity provision process is more resilient for companies that operate in stronger investor protection environments. Our findings contribute to a growing literature that examines the connection between country-level institutions and firm-level valuations (or capital costs).
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