We examine how the relationship between competition and risk-taking changes with the ex ante bank equity capital ratio. We show that competition in the banking market, on average, mitigates risk-taking by banks. This relationship, however, can be altered by a bank’s ex ante equity capital ratio. More specifically, when face with increased competition, banks with low ex ante equity capital ratios engage in relatively larger reductions in risk-taking. They do so primarily by decreasing the risk in their lending portfolios. In contrast, banks with high enough ex ante equity capital ratios might not reduce their risk-taking at all.

We examine the behavior of call options surrounding the underlying stock's ex-dividend date. The evidence is inconsistent with the predictions of a rational exercise policy; a significant fraction of the open interest remains unexercised, resulting in a windfall gain to option writers. This triggers a sophisticated trading scheme that enables short-term traders to receive a significant fraction of the gains. The trading scheme inflates reported volume and distorts its traditional relations to liquidity. The dramatic increases in the volume of trade on the last cum-dividend day are facilitated by limitations on transaction costs passed by the various option exchanges.

We examine the effects of secondary market liquidity on firm value and the IPO decision. Competitive aftermarket liquidity provision is associated with reduced welfare and a discounted secondary market price that can dissuade IPOs. The competitive market fails in particular for firms or at times when uncertainty regarding fundamental value and asymmetric information are large in combination. In these cases, firm value and welfare are improved by a contract where the firm engages a designated market maker to enhance liquidity. Such contracts represent a market solution to a market imperfection, particularly for small, growth firms.

We exploit a discontinuity in the New York Stock Exchange Designated Market Maker (DMM) contract to identify causal effects of DMM participation on equilibrium market outcomes. We document that contractual features that enhance DMM participation are associated with increased depth, narrower bid-ask spreads, and higher rates of price improvement, with most of the improvements attributable to increases in liquidity provision on markets other than the NYSE. These results cannot be attributed to the mechanical effects of the contractual changes and support the interpretation that market making is characterized by strategic complementarity. Received October 7, 2017; editorial decision December 10, 2018 by Editor Itay Goldstein.