Disclosure Quality and Market Liquidity

23 Pages Posted: 10 Feb 2001

See all articles by Frank Heflin

Frank Heflin

University of Georgia - J.M. Tull School of Accounting

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy

John J. Wild

University of Wisconsin - Madison - Department of Accounting and Information Systems

Date Written: September 2000

Abstract

We find that firms with higher quality disclosures have lower effective bid-ask spreads and lower adverse selection spread components. In contrast, we also find that firms with higher quality disclosures have lower quoted depths, resulting in no unambiguous conclusion regarding market liquidity and disclosure quality. These results illustrate the importance of examining both spreads and depths when studying market liquidity. We reconcile these seemingly conflicting results by performing a series of tests involving trade sizes and depths. We conclude that a policy of higher quality disclosures does, indeed, enhance a firm's market liquidity. In addition, our analyses suggest it is the quality of accounting information, rather than management's private communications with analysts, that drives relations between information quality and market liquidity. Thus our results suggest high quality accounting information, publicly available to all investors, helps reduce information asymmetry.

Keywords: Liquidity, spreads, depths, accounting quality

JEL Classification: M41, M45, G12

Suggested Citation

Heflin, Frank and Shaw, Kenneth W. and Wild, John J., Disclosure Quality and Market Liquidity (September 2000). Available at SSRN: https://ssrn.com/abstract=251849 or http://dx.doi.org/10.2139/ssrn.251849

Frank Heflin (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706-542-1616 (Phone)
706-542-3630 (Fax)

Kenneth W. Shaw

University of Missouri at Columbia - School of Accountancy ( email )

420 Cornell Hall
Columbia, MO 65211
United States
573-882-5939 (Phone)
573-882-2437 (Fax)

John J. Wild

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

Wisconsin School of Business
975 University Avenue / Grainger Hall
Madison, WI 53706
United States
608-262-8122 (Phone)

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