Clear and liquid: The interaction of firm disclosure and trader competition

53 Pages Posted: 17 Jan 2019

See all articles by Efstathios Avdis

Efstathios Avdis

University of Alberta - Department of Finance and Statistical Analysis

Sanjay Banerjee

University of Alberta - Department of Accounting, Operations & Information Systems

Multiple version iconThere are 2 versions of this paper

Date Written: January 16, 2019

Abstract

In an economy where traders absorb information partially, we study the effect of disclosure accuracy and disclosure clarity on financial markets. Accuracy measures how precisely a disclosure identifies the firm's fundamentals, whereas clarity measures how well traders understand the disclosure. Trading volume increases monotonically in clarity, while liquidity has a U-shaped relationship with clarity if competition among traders is intense. Volume and liquidity both decrease in accuracy due to adverse selection among different market participants. Moreover, traders' attention to disclosure is hump-shaped in clarity, but increasing in accuracy. Trading profits mimic the patterns of attention, but only under intense competition. Overall, our results suggest that the current trend of increasing complexity in firm disclosures is detrimental to liquidity and volume.

Keywords: Competition, bounded rationality, accuracy, clarity

JEL Classification: D53, G14, M41, D82

Suggested Citation

Avdis, Efstathios and Banerjee, Sanjay, Clear and liquid: The interaction of firm disclosure and trader competition (January 16, 2019). 2019 Canadian Academic Accounting Association (CAAA) Annual Conference, Available at SSRN: https://ssrn.com/abstract=3317108 or http://dx.doi.org/10.2139/ssrn.3317108

Efstathios Avdis (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada

Sanjay Banerjee

University of Alberta - Department of Accounting, Operations & Information Systems ( email )

Edmonton, Alberta T6G 2R6
Canada

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