Do Temporary Increases in Information Asymmetry Affect the Cost of Equity?

Management Science, Forthcoming

38 Pages Posted: 8 May 2008 Last revised: 22 May 2014

See all articles by Shai Levi

Shai Levi

Tel Aviv University

Xiao-Jun Zhang

University of California, Berkeley - Accounting Group; China Academy of Financial Research (CAFR)

Date Written: February 9, 2013

Abstract

Prior literature finds that long-lasting changes in firms’ disclosure policies and information environment affect the cost of equity. Information asymmetry, however, also changes during the fiscal quarter. Firms disclose information periodically, and in between disclosure dates traders can obtain private information and adverse selection risk increases. Such temporary increases in information asymmetry are usually considered to be diversifiable or too small to impact returns. For example, investors have the option to postpone trades or sell other assets in their portfolio on high information asymmetry days. We, however, find that returns increase substantially on days during the fiscal quarter when adverse-selection risk is high and liquidity low. Consistent with theory, we show that temporary asymmetry affects returns when investors demand liquidity and market makers bear risk for carrying capacity and providing it.

Keywords: Information Asymmetry, Earnings Release, Expected Returns

JEL Classification: M41, G12

Suggested Citation

Levi, Shai and Zhang, Xiao-Jun, Do Temporary Increases in Information Asymmetry Affect the Cost of Equity? (February 9, 2013). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1130667 or http://dx.doi.org/10.2139/ssrn.1130667

Shai Levi (Contact Author)

Tel Aviv University ( email )

Tel Aviv, 69978
Israel

Xiao-Jun Zhang

University of California, Berkeley - Accounting Group ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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