Information Asymmetry and the Ex Ante Impact of Public Disclosure Quality on Price Efficiency and the Cost of Capital: Evidence from a Laboratory Market

58 Pages Posted: 21 Aug 2013

See all articles by Orie E. Barron

Orie E. Barron

Pennsylvania State University

Hong Qu

Kennesaw State University - Michael J. Coles College of Business

Date Written: August 19, 2013

Abstract

This paper examines the ex ante effects of public information quality on market prices and how such effects vary with information asymmetry among traders in a two-period experimental market. We vary public information quality by changing its precision and information asymmetry among traders by varying the distribution of private signals. We find high quality public disclosure leads to increased price efficiency and decreased cost of capital in the pre-announcement period when information asymmetry is high. The impending high quality public information increases the competition among informed traders, which leads prices to impound more private information and alleviates adverse selection problem facing uninformed traders. Our study suggests that building a high quality public information environment, e.g., by adopting a high quality accounting standards or following transparent disclosure policy is likely to provide ex ante benefits for firms with significant adverse selection among traders.

Keywords: public information quality, experimental markets, cost of capital, information asymmetry, adverse selection

JEL Classification: G14, C92

Suggested Citation

Barron, Orie E. and Qu, Hong, Information Asymmetry and the Ex Ante Impact of Public Disclosure Quality on Price Efficiency and the Cost of Capital: Evidence from a Laboratory Market (August 19, 2013). Available at SSRN: https://ssrn.com/abstract=2312812 or http://dx.doi.org/10.2139/ssrn.2312812

Orie E. Barron

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-863-3230 (Phone)
814-863-8393 (Fax)

Hong Qu (Contact Author)

Kennesaw State University - Michael J. Coles College of Business ( email )

1000 Chastain Road
Kennesaw, GA 30144
United States

HOME PAGE: http://https://works.bepress.com/hong-qu/

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