Three essays on financial market design, liquidity and long-term equity returns

In three essays, I empirically analyze the impact of market-design features of stock exchanges and derivative exchanges on short-term liquidity and long-term equity returns. Certain institutional design features produce significantly lower spreads and cost of equity than others.; My first essay investigates the institutional design of 51 stock exchanges and analyzes the impact of these institutional characteristics on liquidity measures such as closing bid-ask spreads, volatility and trading turnover. Exchange-design features such as hybrid trading mechanisms, narrower tick sizes, designated market makers, consolidated limit order books, automated trade execution, centralized order-flow, and better shareholder rights are associated with lower spreads. These results have important implications for investors' trading strategy, firms' listing strategy, and exchanges' organizational strategy.; In my second essay, I assemble a new dataset containing the historical dates of announcement and actual implementation of electronic trading, and abolition of floor trading by the leading exchange of 118 countries. Applying a dividend growth model on panel of dividend yield, this essay finds that the advent of electronic trading is associated with a drop in the average equity premium by about 0.08% per month. Consistent with this reduction in equity premium in the long run, there is a positive short-term price reaction to the switch. These findings are strengthened after controlling for risk factors, financial integration, economic liberalization, and economic development. Thus, automation of trading benefits both investors, who pay lower trading-spreads, and firms, who face lower cost of equity.; The final essay investigates the institutional design of 23 derivatives-exchanges and analyzes the impact of these institutional characteristics on liquidity of equity-options measured by their closing bid-ask spreads. Competition between exchanges, higher trading volumes, and narrower tick sizes are associated with lower spreads. However, trading an option and its underlying stock on the same exchange does not seem to have any spread reducing effect. Better shareholder rights also do not affect option spreads significantly, which seem to suggest that regulators pay more attention on equity markets than on option markets.