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Do voluntary disclosures of bad news improve liquidity?

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  • Dayanandan, Ajit
  • Donker, Han
  • Karahan, Gökhan

Abstract

Can managers improve market liquidity and lower the cost of capital by providing voluntary earnings guidance? This study examines the impact of profit warnings on market liquidity and finds that voluntary disclosure of bad news actually improves market liquidity. By conducting an empirical study over the period 1995–2010 on NYSE, NASDAQ and AMEX listed firms, we find that firms that issue profit warnings show enhanced market liquidity during the post-announcement period. We show that profit warnings reduce information asymmetry and lower bid-ask spreads and increase trading volumes. These results are invariant to daily (short run) and monthly (long run) data after controlling for firm specific attributes. The results have major corporate policy implications. By voluntarily disclosing negative earnings guidance by managers, firms will experience significant improvement in market liquidity, thereby lowering the cost of capital. Our results are even more profound for firms that release bad news with extremely negative stock market impact. In other words, voluntary disclosure of bad news is good for market liquidity.

Suggested Citation

  • Dayanandan, Ajit & Donker, Han & Karahan, Gökhan, 2017. "Do voluntary disclosures of bad news improve liquidity?," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 16-29.
    • Handle: RePEc:eee:ecofin:v:40:y:2017:i:c:p:16-29
    DOI: 10.1016/j.najef.2017.01.002
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    2. Ilyas El Ghordaf & Abdelbari El Khamlichi, 2021. "Profit Warnings And Stock Returns: Evidence From Moroccan Stock Exchange," Post-Print hal-03420284, HAL.
    3. Huang, Hung-Yi & Ho, Kung-Cheng, 2020. "Liquidity, earnings management, and stock expected returns," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    4. Hyunkwon Cho & Robert Kim, 2021. "Asymmetric effects of voluntary disclosure on stock liquidity: evidence from 8‐K filings," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 803-846, March.
    5. Ilyas El Ghordaf & Abdelbari El Khamlichi, 2021. "Profit warnings and stock returns: Evidence from moroccan stock exchange," Papers 2111.06655, arXiv.org.
    6. Ho, Kung-Cheng & Sun, Renji & Yang, Lei & Li, Hui-Min, 2023. "Information disclosure as a means of minimizing asymmetric financial reporting: The role of market reaction," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1221-1240.

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    More about this item

    Keywords

    Profit warning; Bad news; Voluntary disclosure; Liquidity;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting

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