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The effect of voluntary disclosure on stock liquidity: New evidence from index funds

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  • Schoenfeld, Jordan

Abstract

This study tests whether voluntary disclosure affects stock liquidity. I argue that index funds fit the profile of nonstrategic traders who, according to theory, are unambiguously more likely than managers and strategic investors to prefer high stock liquidity and thus high disclosure. This suggests that I can use index funds' disclosure preferences to construct an empirical model of voluntary disclosure that abstracts away from managers' strategic disclosure motives. Accordingly, I use an index-fund setting to construct a recursive structural equation model of voluntary disclosure, index fund ownership, and liquidity. I find that when a firm joins the S&P 500 index, voluntary disclosure increases with the level of ownership assumed by index funds, and this increase in disclosure is associated with increased stock liquidity. These results imply that voluntary disclosure increases stock liquidity.

Suggested Citation

  • Schoenfeld, Jordan, 2017. "The effect of voluntary disclosure on stock liquidity: New evidence from index funds," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 51-74.
  • Handle: RePEc:eee:jaecon:v:63:y:2017:i:1:p:51-74
    DOI: 10.1016/j.jacceco.2016.10.007
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    1. repec:eee:finmar:v:39:y:2018:i:c:p:44-67 is not listed on IDEAS
    2. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9408-0 is not listed on IDEAS

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    Keywords

    Disclosure; Index funds; Stock liquidity;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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