How Does More Frequent Reporting Reduce Information Asymmetry?
56 Pages Posted: 27 Jul 2017 Last revised: 21 Nov 2019
Date Written: November 20, 2019
In countries around the world, policymakers debate whether companies should report semiannually or quarterly. This study contributes to that debate by examining the mechanism behind the drop in information asymmetry that accompanies a switch to quarterly reporting. Using U.S. data, I show that Amihud (2002) illiquidity, a common information asymmetry proxy, grows by 10.7% over the intervening period between two quarterly earnings announcements. This growth occurs gradually throughout the entire period. A semiannual reporter that switches to quarterly reporting will cut this growth time in half by cutting each semiannual reporting period into two quarterly reporting periods. As a result, it will reduce information asymmetry in what would have been the second half of the semiannual reporting period. I confirm this in international settings, where I find that switching from semiannual to quarterly reporting reduces Amihud (2002) illiquidity by up to 5% in the second half of each semiannual period.
Keywords: reporting frequency, information asymmetry
Suggested Citation: Suggested Citation