Disclosure Policy, Information Asymmetry, and Liquidity in Equity Markets*

Abstract. This study investigates the relation between disclosure policy and liquidity in equity markets. Disclosure policy influences market liquidity because uninformed investors “price protect” against adverse selection, and this price protection is manifested in market liquidity. Bid-ask spreads, the empirical measure of market liquidity used in this study, are predicted to be inversely related to disclosure policy. In addition, increased trading by informed traders and higher probability of information event occurrence are predicted to both increase spreads and intensify the relation between spreads and disclosure policy. These predictions apply during periods in which no news about the firm is disclosed or pending. The results show that relative bid-ask spreads for firms with disclosure rankings in the bottom third of the empirical distribution are approximately 50 percent higher than spreads for firms with disclosure rankings in the top third of the empirical distribution. Tests that assume endogenous disclosure policy reveal a significant negative relation between disclosure policy and spreads, even after controlling for the effects of return volatility, trading volume, and share price. Tests for cross-sectional variation in spreads and for the sensitivity of spreads to disclosure policy based on informed trade activity and probability of information event occurrence are generally consistent with the predictions, though these results are not statistically significant. The findings of this study are consistent with the notion that a well-regarded disclosure policy reduces information asymmetry and hence increases liquidity in equity markets. Resume. L'auteur analyse la relation entre la politique d'information et la liquidite des marches d'actions. La politique d'information influe sur la liquidite du marche, etant donne que les investisseurs non informes se protegent contre les choix prejudiciables en ce qui a trait aux cours, comportement de protection qui se manifeste dans la liquidite du marche. Les ecarts entre les cours acheteur et vendeur, la mesure empirique de la liquidite du marche utilisee dans la presente etude, devraient presenter, selon les previsions, une relation inverse avec la politique d'information. De plus, l'intensification de l'activite des negociateurs informes et la probabilite accrue de l'occurrence d'un evenement d'information devraient, selon les previsions, augmenter tous les deux les ecarts et consolider la relation entre les ecarts et la politique d'information. Ces previsions s'appliquent aux cours des periodes dans lesquelles aucune information nouvelle au sujet de l'entreprise n'est publiee ou n'est sur le point de l'etre. Les resultats demontrent que les ecarts relatifs entre cours acheteur et vendeur des entreprises dont la publication d'information les place dans le tiers inferieur de la distribution empirique sont d'environ 50 pour cent superieurs aux ecarts des entreprises dont la publication d'information les place dans le tiers superieur de la distribution empirique. Les tests qui supposent une politique d'information endogene revelent une relation negative significative entre la politique d'information et les ecarts, meme apres avoir controle les consequences de la volatilite du rendement, le volume des operations et le cours de l'action. Les tests relatifs a la variation transversale des ecarts et de la sensibilite des ecarts a la politique d'information, basee sur l'activite de negociation informee et la probabilite d'occurrence d'un evenement d'information, sont generalement conformes aux previsions, bien que les resultats n'en soient pas statistiquement significatifs. Les conclusions de l'etude confirment le principe selon lequel une politique d'information bien pensee reduit l'asymetrie de l'information et, par consequent, augmente la liquidite des marches d'actions.

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