Thinly Traded Growth Stocks: A Joint Examination of Transparency in Communication and the Trading Platform

Posted: 11 Dec 2012

See all articles by Miles B. Gietzmann

Miles B. Gietzmann

Bocconi University - Department of Accounting

Ivana Raonic

City University London - Sir John Cass Business School

Date Written: December 10, 2012

Abstract

When thinly traded growth stocks (TTGS) listed on a secondary exchange experience difficulty in gaining investors’ attention, one possible solution is to increase the intensity of disclosure. However, if the stock is traded on a quote-driven system, market makers can collude to maintain wide bid-ask spreads that discourage firms from disclosing. As a result, TTGS traded on a quote-driven system can face a liquidity trap that can prevent them from harvesting the benefits of increased disclosure activities. In this paper, we argue that the well-documented negative relation between disclosure and the bid-ask spread is likely to be moderated by the type of protocol chosen by exchanges to handle the trading of TTGS. To test our theory we use a unique setting created by the introduction of a hybrid order-driven protocol for TTGS in the UK. Following an increase in the disclosure activity by a TTGS, we find that the magnitudes of the predicted reductions in the bid-ask spreads are dependent on whether the TTGS switch their trading protocols.

Keywords: Disclosure, Market Microstructure

JEL Classification: D82, D83

Suggested Citation

Gietzmann, Miles B. and Raonic, Ivana, Thinly Traded Growth Stocks: A Joint Examination of Transparency in Communication and the Trading Platform (December 10, 2012). European Accounting Review Forthcoming, Available at SSRN: https://ssrn.com/abstract=2187380

Miles B. Gietzmann

Bocconi University - Department of Accounting ( email )

Via Roentgen 1
Milan, 20136
Italy

Ivana Raonic (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

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