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Disclosure, Liquidity, and the Cost of Capital

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Author Info
 Diamond, Douglas W
Verrecchia, Robert E

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Abstract

This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk-bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making. Copyright 1991 by American Finance Association.

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Publisher Info
Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 46 (1991)
Issue (Month): 4 (September)
Pages: 1325-59
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Handle: RePEc:bla:jfinan:v:46:y:1991:i:4:p:1325-59

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  1. Beuselinck, C. & Deloof, M. & Manigart,S., 2005. "Private equity investments and disclosure policy," Vlerick Leuven Gent Management School Working Paper Series 2005-1, Vlerick Leuven Gent Management School. [Downloadable!]
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  2. Christopher S. Armstrong & Mary E. Barth & Alan D. Jagolinzer & Edward J. Riedl, 2008. "Market Reaction to the Adoption of IFRS in Europe," Working Papers 09-032, Harvard Business School. [Downloadable!]
  3. Armando Gomes & Gary Gorton & Leonardo Madureira, 2004. "SEC Regulation Fair Disclosure, Information, and the Cost of Capital," NBER Working Papers 10567, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Besancenot, Damien & Vranceanu, Radu, 2004. "The Information Limit to Honest Managerial Behavior," ESSEC Working Papers DR 04008, ESSEC Research Center, ESSEC Business School. [Downloadable!]
  5. Antonio Bernardo & Ivo Welch, 2002. "Financial Market Runs," University of California at Los Angeles, Anderson Graduate School of Management 1043, Anderson Graduate School of Management, UCLA. [Downloadable!]
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  6. Benjamin E. Hermalin & Michael S. Weisbach, 2007. "Transparency and Corporate Governance," NBER Working Papers 12875, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. René M. Stulz, 2008. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," NBER Working Papers 14218, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Michael S. Gibson, 1998. "The implications of risk management information systems for the organization of financial firms," International Finance Discussion Papers 632, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Gaston R. Gelos & Shang-Jin Wei, 2002. "Transparency and International Investor Behavior," IMF Working Papers 02/174, International Monetary Fund. [Downloadable!]
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  10. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2006. "Look at Me Now: What Attracts U.S. Shareholders?," NBER Working Papers 12500, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Benito Arruñada, 2008. "Mandatory Accounting Disclosure by Small Private Companies," Economics Working Papers 1090, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  12. Lawrence J. White, 2003. "What Constitutes Appropriate Disclosure for a Financial Conglomerate?," Working Papers 03-03, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
  13. Benjamin E. Hermalin & Michael S. Weisbach, 2006. "A Framework for Assessing Corporate Governance Reform," NBER Working Papers 12050, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. Réal Labelle & Alain Schatt, 2005. "Structure de propriété et communication financière des entreprises françaises;Ownership Structure and Corporate Disclosures:The French Case," Working Papers FARGO 1050701, Université de Bourgogne - LEG/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  15. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2008. "Why do U.S. cross-listings matter?," International Finance Discussion Papers 930, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  16. Davies, Phil & Minton, Bernadette & Schrand, Catherine, 2008. "Commodity Price Exposure and Ownerhsip Clienteles," Working Paper Series 2008-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  17. Rachel Glennerster & Yongseok Shin, 2008. "Does Transparency Pay?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 55(1), pages 183-209, April. [Downloadable!] (restricted)
  18. S. P. Kothari, 2000. "The role of financial reporting in reducing financial risks in the market," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, issue Jun, pages 89-112. [Downloadable!]
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