Does Financial Market Structure Impact the Cost of Raising Capital?

Abstract

We provide direct evidence on financial market structure and the cost of raising capital by examining major market structure changes in US equities markets. Only the Order Handling Rules (OHR), which transformed Nasdaq from a dealer-oriented over-the-counter market to a market where investors directly interact with each other via limit orders, lowered the cost of raising capital. Using a difference-in-difference framework relative to the NYSE and exploiting the OHR’s staggered implementation, we find that the OHR reduced the implicit costs (under-pricing) of seasoned equity offerings by one to two percentage points compared to a pre-OHR average of 3.6 percent. The effect is the largest in stocks with the largest reduction in institutional trading costs after the OHR.