This study examines the effects of stock liquidity on firm value and corporate governance using the Real Estate Investment Trust (REIT) setting. The unique features of the REIT industry, including homogeneity of the investment structures, the high payout requirement, and the importance of institutional investors, highlight the positive effect of stock liquidity on firm value through corporate governance. To address the endogeneity problem, we perform a difference-in-differences test based on the propensity score matching estimator. The result shows that REIT stock liquidity has a causal and positive effect on firm value, as measured by Tobin's Q. Importantly, REIT stock liquidity is conducive to better corporate governance through the channel of institutional ownership. REIT stock liquidity leads to higher institutional ownership, particularly for institutional investor types that are active monitors and institutional investors with multi-firm ownership in their REIT portfolios.

This paper examines the informational role of equity options trading around Federal Open Market Committee (FOMC) announcements. We find that information contained in option trades prior to FOMC rate change announcements, measured as implied volatility spread, predicts bank stock returns to a greater degree than does volatility spread prior to non-meeting days. We examine U.S. banks due to their interest rate sensitivity; however, we also show that return predictability around rate changes is reliably stronger in all firms, across all industries that are more interest rate sensitive. We find that return predictability is primarily driven by surprise changes in interest rates that occur during meetings with high degrees of information asymmetry. Finally, we document that volatility spread impounds information about FOMC meetings before that information is reflected in stock prices; this effect is significantly greater during surprise events, suggesting that the options market is an important source of informed trading.