IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v12y2007i2d10.1007_s11142-007-9032-5.html
   My bibliography  Save this article

How disclosure quality affects the level of information asymmetry

Author

Listed:
  • Stephen Brown

    (Goizueta Business School)

  • Stephen A. Hillegeist

    (Accounting and Control Area)

Abstract

We examine two potential mechanisms through which disclosure quality is expected to reduce information asymmetry: (1) altering the trading incentives of informed and uninformed investors so that there is relatively less trading by privately informed investors, and (2) reducing the likelihood that investors discover and trade on private information. Our results indicate that the negative relation between disclosure quality and information asymmetry is primarily caused by the latter mechanism. While information asymmetry is negatively associated with the quality of the annual report and investor relations activities, it is positively associated with quarterly report disclosure quality. Additionally, we hypothesize and find that that the negative association between disclosure quality and information asymmetry is stronger in settings characterized by higher levels of firm-investor asymmetry.

Suggested Citation

  • Stephen Brown & Stephen A. Hillegeist, 2007. "How disclosure quality affects the level of information asymmetry," Review of Accounting Studies, Springer, vol. 12(2), pages 443-477, September.
    • Handle: RePEc:spr:reaccs:v:12:y:2007:i:2:d:10.1007_s11142-007-9032-5
    DOI: 10.1007/s11142-007-9032-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-007-9032-5
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-007-9032-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Atiase, Rk, 1985. "Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 23(1), pages 21-36.
    2. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    3. Chakravarty, Sugato, 2001. "Stealth-trading: Which traders' trades move stock prices?," Journal of Financial Economics, Elsevier, vol. 61(2), pages 289-307, August.
    4. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," The Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-651.
    5. Jerry Hausman, 2015. "Specification tests in econometrics," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 38(2), pages 112-134.
    6. Waymire, G, 1985. "Earnings Volatility And Voluntary Management Forecast Disclosure," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 23(1), pages 268-295.
    7. Easley, David & O'Hara, Maureen & Paperman, Joseph, 1998. "Financial analysts and information-based trade," Journal of Financial Markets, Elsevier, vol. 1(2), pages 175-201, August.
    8. Paul M. Healy & Amy P. Hutton & Krishna G. Palepu, 1999. "Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 485-520, September.
    9. Leuz, C & Verrecchia, RE, 2000. "The economic consequences of increased disclosure," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38, pages 91-124.
    10. David S. Gelb & Paul Zarowin, 2002. "Corporate Disclosure Policy and the Informativeness of Stock Prices," Review of Accounting Studies, Springer, vol. 7(1), pages 33-52, March.
    11. Easley, David & Kiefer, Nicholas M & O'Hara, Maureen, 1997. "One Day in the Life of a Very Common Stock," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 805-835.
    12. James Jiambalvo & Shivaram Rajgopal & Mohan Venkatachalam, 2002. "Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 117-145, March.
    13. Merton, Robert C, 1987. "A Simple Model of Capital Market Equilibrium with Incomplete Information," Journal of Finance, American Finance Association, vol. 42(3), pages 483-510, July.
    14. Lee, Charles M C & Ready, Mark J, 1991. "Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-746, June.
    15. Coller, M & Yohn, TL, 1997. "Management forecasts and information asymmetry: An examination of bid-ask spreads," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 35(2), pages 181-191.
    16. repec:bla:jfinan:v:44:y:1989:i:3:p:633-46 is not listed on IDEAS
    17. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    18. Madhavan, Ananth & Richardson, Matthew & Roomans, Mark, 1997. "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 10(4), pages 1035-1064.
    19. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 38, pages 171-202.
    20. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    21. Christine A. Botosan & Marlene A. Plumlee, 2002. "A Re‐examination of Disclosure Level and the Expected Cost of Equity Capital," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(1), pages 21-40, March.
    22. Fama, Eugene F & Laffer, Arthur B, 1971. "Information and Capital Markets," The Journal of Business, University of Chicago Press, vol. 44(3), pages 289-298, July.
    23. Mary E. Barth & Ron Kasznik & Maureen F. McNichols, 2001. "Analyst Coverage and Intangible Assets," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 39(1), pages 1-34, June.
    24. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2005. "The market pricing of accruals quality," Journal of Accounting and Economics, Elsevier, vol. 39(2), pages 295-327, June.
    25. Bushee, Brian J. & Matsumoto, Dawn A. & Miller, Gregory S., 2003. "Open versus closed conference calls: the determinants and effects of broadening access to disclosure," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 149-180, January.
    26. Russell Lundholm & Linda A. Myers, 2002. "Bringing the Future Forward: The Effect of Disclosure on the Returns‐Earnings Relation," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(3), pages 809-839, June.
    27. Verrecchia, Re, 1982. "The Use Of Mathematical-Models In Financial Accounting," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 20, pages 1-42.
    28. Carol. A. Marquardt & Christine I. Wiedman, 1998. "Voluntary Disclosure, Information Asymmetry, and Insider Selling through Secondary Equity Offerings," Contemporary Accounting Research, John Wiley & Sons, vol. 15(4), pages 505-537, December.
    29. Brown, Stephen & Hillegeist, Stephen A. & Lo, Kin, 2004. "Conference calls and information asymmetry," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 343-366, September.
    30. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    31. Michael J. Fishman & Kathleen M. Hagerty, 1989. "Disclosure Decisions by Firms and the Competition for Price Efficiency," Journal of Finance, American Finance Association, vol. 44(3), pages 633-646, July.
    32. Guochang Zhang, 2001. "Private Information Production, Public Disclosure, and the Cost of Capital: Theory and Implications," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 363-384, June.
    33. Barclay, Michael J. & Warner, Jerold B., 1993. "Stealth trading and volatility : Which trades move prices?," Journal of Financial Economics, Elsevier, vol. 34(3), pages 281-305, December.
    34. Ajinkya, Bb & Gift, Mj, 1984. "Corporate Managers Earnings Forecasts And Symmetrical Adjustments Of Market Expectations," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 22(2), pages 425-444.
    35. Frank L. Heflin & Kenneth W. Shaw & John J. Wild, 2005. "Disclosure Policy and Market Liquidity: Impact of Depth Quotes and Order Sizes," Contemporary Accounting Research, John Wiley & Sons, vol. 22(4), pages 829-865, December.
    36. Lang, M & Lundholm, R, 1993. "Cross-Sectional Determinants Of Analyst Ratings Of Corporate Disclosures," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 31(2), pages 246-271.
    37. Guohua Jiang & Charles M. C. Lee & Yi Zhang, 2005. "Information Uncertainty and Expected Returns," Review of Accounting Studies, Springer, vol. 10(2), pages 185-221, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Kartik Raman & Lakshmanan Shivakumar & Ane Tamayo, 2013. "Target’s earnings quality and bidders’ takeover decisions," Review of Accounting Studies, Springer, vol. 18(4), pages 1050-1087, December.
    2. Yonca Ertimur, 2007. "Discussion of “How disclosure quality affects the level of information asymmetry”," Review of Accounting Studies, Springer, vol. 12(2), pages 479-485, September.
    3. Stephen P. Baginski & Kenneth C. Rakow, 2012. "Management earnings forecast disclosure policy and the cost of equity capital," Review of Accounting Studies, Springer, vol. 17(2), pages 279-321, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    2. Brown, Stephen & Hillegeist, Stephen A. & Lo, Kin, 2004. "Conference calls and information asymmetry," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 343-366, September.
    3. Jean-François Gajewski & Li Li, 2015. "Can Internet-Based Disclosure Reduce Information Asymmetry?," Post-Print halshs-01497381, HAL.
    4. Gajewski, Jean-François & Li, Li, 2015. "Can Internet-based disclosure reduce information asymmetry?," Advances in accounting, Elsevier, vol. 31(1), pages 115-124.
    5. Karthik Balakrishnan & Mary Brooke Billings & Bryan Kelly & Alexander Ljungqvist, 2014. "Shaping Liquidity: On the Causal Effects of Voluntary Disclosure," Journal of Finance, American Finance Association, vol. 69(5), pages 2237-2278, October.
    6. Yonca Ertimur, 2007. "Discussion of “How disclosure quality affects the level of information asymmetry”," Review of Accounting Studies, Springer, vol. 12(2), pages 479-485, September.
    7. Loukil, Nadia & Yousfi, Ouidad, 2010. "Firm's information environment and stock liquidity: evidence from Tunisian context," MPRA Paper 28699, University Library of Munich, Germany, revised Feb 2011.
    8. He, Yan & Wang, Junbo & Wei, K.C. John, 2011. "Do bond rating changes affect the information asymmetry of stock trading?," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 103-116, January.
    9. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017, January-A.
    10. Ravi, Rahul & Hong, Youna, 2014. "Firm opacity and financial market information asymmetry," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 83-94.
    11. repec:uts:finphd:34 is not listed on IDEAS
    12. Heitzman, Shane & Wasley, Charles & Zimmerman, Jerold, 2010. "The joint effects of materiality thresholds and voluntary disclosure incentives on firms' disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 109-132, February.
    13. Billings, Mary Brooke & Jennings, Robert & Lev, Baruch, 2015. "On guidance and volatility," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 161-180.
    14. Elizabeth Blankespoor & Brian P. Miller & Hal D. White, 2014. "Initial evidence on the market impact of the XBRL mandate," Review of Accounting Studies, Springer, vol. 19(4), pages 1468-1503, December.
    15. Jennifer Francis & Dhananjay Nanda & Per Olsson, 2008. "Voluntary Disclosure, Earnings Quality, and Cost of Capital," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 46(1), pages 53-99, March.
    16. Jong-Hag Choi & Linda A. Myers & Yoonseok Zang & David A. Ziebart, 2011. "Do management EPS forecasts allow returns to reflect future earnings? Implications for the continuation of management’s quarterly earnings guidance," Review of Accounting Studies, Springer, vol. 16(1), pages 143-182, March.
    17. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 54(2), pages 525-622, May.
    18. Brown, Stephen & Hillegeist, Stephen A. & Lo, Kin, 2009. "The effect of earnings surprises on information asymmetry," Journal of Accounting and Economics, Elsevier, vol. 47(3), pages 208-225, June.
    19. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).
    20. Chaiyasit Anuchitworawong, 2010. "The Value of Principles-Based Governance Practices and the Attenuation of Information Asymmetry," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 17(2), pages 171-207, June.
    21. Fu, Renhui & Kraft, Arthur & Zhang, Huai, 2012. "Financial reporting frequency, information asymmetry, and the cost of equity," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 132-149.

    More about this item

    Keywords

    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:12:y:2007:i:2:d:10.1007_s11142-007-9032-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.