The Effect of Disclosure Opacity on Trading Opacity: New Evidence from ADR Trades in Dark Pools
54 Pages Posted: 7 May 2019
Date Written: March 25, 2019
As volume increasingly migrates away from exchanges to dark pools, we revisit the link between disclosure opacity and volume, conditional on the choice to trade in a dark venue. We exploit the exogenous variation in home-country reporting opacity to examine how disclosure quality affects the fraction of ADR volume traded in dark pools. Using multiple metrics for reporting quality and controlling for firms’ information environment, we find that dark pool volume is positively correlated with home-country reporting opacity. This relationship holds after controlling for observable differences between ADRs and other securities that trade in dark pools (matched sample analysis) and the possible endogenous determination of home-country reporting opacity and dark pool volume. The positive relation is stronger for ADRs held by institutions with low turnover and diversified holdings, and weaker for ADRs with greater ownership by institutions with large and stable ownership positions. Bid-ask spreads are positively correlated with dark pool volume for ADRs, consistent with research that finds a negative effect of dark pool trading on market quality.
Keywords: Accounting quality, Disclosure, Dark pools, Liquidity, Opacity
JEL Classification: G10, G11, M41
Suggested Citation: Suggested Citation