How Disclosure Quality Affects the Long-Run Level of Information Asymmetry

INSEAD Working Paper

43 Pages Posted: 23 Jan 2002

See all articles by Stephen Brown

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Date Written: January 2006

Abstract

This study examines how disclosure quality is related to the long-run level of information asymmetry. We examine two potential mechanisms through which disclosure quality is expected to reduce the long-run level of information asymmetry: (1) disclosure quality will alter the trading incentives of investors and lead to relatively less trading by privately informed investors, and (2) disclosure quality will reduce the incentives to search for private information and lead to fewer private information events. Our cross-sectional analyses take into account the potential endogeneity between disclosure quality and information asymmetry. The results indicate that each of the two hypothesized mechanisms give rise to the negative association between disclosure quality and information asymmetry. These results add to our understanding of how disclosure quality affects a firm's information and trading environments.

Keywords: Disclosure quality; Information asymmetry; Microstructure, private information events

JEL Classification: C21, D82, G10, M40, M41, M45

Suggested Citation

Brown, Stephen and Hillegeist, Stephen A., How Disclosure Quality Affects the Long-Run Level of Information Asymmetry (January 2006). INSEAD Working Paper, Available at SSRN: https://ssrn.com/abstract=297371 or http://dx.doi.org/10.2139/ssrn.297371

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Stephen A. Hillegeist (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

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