Leverage and Liquidity: Evidence from the Closed-End Fund Industry

Friday, November 30, 2012 ( 1:00 pm to 2:00 pm )

Location: Babbio 221

Howe School Seminar

Yuehua Tang,
Georgia State University



This paper uses the February 2008 auction rate security (ARS) market freeze to examine the spillover effects of an exogenous funding liquidity shock on the underlying asset markets. Consistent with theory, I find that the stocks held by closed-end funds (CEFs) that borrow from the ARS market experience larger declines in market liquidity and lower returns than other stocks after the ARS market freeze. These effects are more pronounced when (i) these ARS-levered CEFs hold a larger fraction of shares outstanding, (ii) the borrowing level from the ARS market is higher, and (iii) the stocks are less liquid before the ARS market freeze. The spillover effects of the ARS market freeze are temporary and diminish during the next 12 months. Further investigation shows that the spillover effects are indeed associated with the heavy selling behavior of the ARS-levered CEFs after experiencing the ARS market shock. Overall, this study provides evidence that a funding liquidity shock to financial institutions can cause a decline in both market liquidity and the prices of the underlying assets.



Mr. Tang is a Ph.D. candidate in Finance at J. Mack Robinson College of Business of Georgia State University, expecting to complete his degree by May 2013. He is also an instructor in Finance at Georgia State University, teaching a undergraduate course in corporate finance since Fall 2011. He got his B.A. degree in Economics from Nankai University in 2006, M.A. degree in Economics from Renmin University of China in 2008, and M.A. degree in International Economics from the University of Antwerp in 2008.


His current research focuses on various issues related Asset Pricing and Investments, including Portfolio Management, Institutional Investors, Mutual Funds and Hedge Funds, Capital Markets. His research has been published in academic journals including Journal of Finance and Journal of International Politics. His research has been presented at various top academic conferences such as American Finance Association (AFA) Annual Meeting and NBER Law and Economics Program Meeting. His research has been cited in the financial press and magazines including The Wall Street Journal and Forbes.