Zero-Leverage Firms in the U.K. Market
: Stock Trading and Firm Performance

  • Sijia Zhang

    Student thesis: Doctoral Thesis


    In my thesis, I examine stock market reactions and liquidity effects following the first, subsequent and all bank loan announcements of zero-leverage firms. Using a sample of 96 zero-leverage firms listed on the FTSE 350 index over the time period of 2000-2015, I find evidence of a significant and permanent stock price increase as a result of the initial loan announcement. The loan announcement results in a sustained increase in trading volume and liquidity. This improvement continues to persist once I control for stock price and trading volume effects in both the short and long run. Furthermore, I examine the spread decomposition around the same period, and discover that the adverse selection of the bid-ask spread is significantly related to the initial bank loan announcement. Then I continue my research focus on the subsequent loan of zero-leverage firms, I discover a significant and permanent stock price increase as a result of the subsequent debt announcement, but not as pronounced as the initial loan announcement.

    With the majority of existing research based on the block trading data, I am the first to examine the order flow ratio of zero-leverage firms. Based on 16 years examine period, I discover price continuations follow buys and reversals follow sales. I also observe that purchases have a greater impact on permanent price changes. Once price effects are estimated using quote returns to eliminate the bid-ask bias, the asymmetry in buyer-and seller-initiated trades is dramatically reduced. I find that there is a clear tendency that the order flow is imbalanced during the announcement period.

    My results can be attributed to the information cost/liquidity hypothesis, suggesting that investors demand a lower premium for trading stocks with more available information. The bid-ask bounce can explain asymmetry in the trading direction of zero-leverage firms when they encounter debt for the first time. The announcement effect impact on the initial loan are significant different from any other bank loans, which confirms the unique role of the bank system and the significant effect of the levering up of debt free firms.
    Date of AwardJul 2019
    Original languageEnglish
    Awarding Institution
    • University of Brighton
    SupervisorAndros Gregoriou (Supervisor) & Jerome Healy (Supervisor)

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