The Effect of Information Quality on Liquidity Risk
Singapore Management University - School of Accountancy
March 18, 2011
Journal of Accounting & Economics (JAE), Forthcoming
I investigate whether information quality affects the cost of equity capital through liquidity risk. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity; recent asset pricing literature has emphasized the importance of this systematic risk. I find that higher information quality is associated with lower liquidity risk and that the reduction in cost of capital due to this association is economically significant. I also find that the negative association between information quality and liquidity risk is stronger in times of large shocks to market liquidity.
Keywords: Information quality, Earnings quality, Liquidity Risk, Cost of Capital, Disclosure
JEL Classification: G01, G11, G12, G14, M41Accepted Paper Series
Date posted: March 31, 2011 ; Last revised: April 18, 2013
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