On Information Asymmetry Metrics

60 Pages Posted: 18 Jan 2001

See all articles by Jonathan Clarke

Jonathan Clarke

Georgia Institute of Technology - Scheller College of Business

Kuldeep Shastri

University of Pittsburgh - Finance Group

Date Written: November 2000

Abstract

The purpose of this paper is to provide a systematic empirical comparison of the different proxy variables used to measure information asymmetry. We construct different information asymmetry measures based on a firm's growth opportunities, the market microstructure of the firm's stock, and analysts' forecasts of a firm's earnings per share and examine their correlations under different sampling situations. We also study the ability of the microstructure-based measures, which can be calculated at any point in time, to detect trends in corporate finance proxies, which are measured quarterly. We find that the market microstructure measures tend to be highly correlated with one another. Moreover, they are related to firm characteristics that ex ante should be associated with information asymmetry. The market microstructure measures tend to be related to analyst forecast errors only for large, widely followed firms. Our results also indicate that monthly changes in the microstructure measures of information asymmetry are significantly correlated with annual changes in the corporate finance proxy variables.

Keywords: Information asymmetry, market microstructure, adverse selection costs, analyst forecasts, corporate finance

JEL Classification: G19, G39

Suggested Citation

Clarke, Jonathan and Shastri, Kuldeep, On Information Asymmetry Metrics (November 2000). Available at SSRN: https://ssrn.com/abstract=251938 or http://dx.doi.org/10.2139/ssrn.251938

Jonathan Clarke

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-4929 (Phone)
404-894-6030 (Fax)

HOME PAGE: http://mgt.gatech.edu/directory/clarke.html

Kuldeep Shastri (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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