What Happens to Trading Volume When the Regulator Bans Voluntary Disclosure?

European Accounting Review, Forthcoming

49 Pages Posted: 21 Jul 2019 Last revised: 22 Jul 2019

See all articles by Menachem (Meni) Abudy

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration

Efrat Shust

The Department of Management and Economics, The Open University of Israel

Date Written: July 10, 2019

Abstract

This paper exploits a unique natural experiment in which a regulator limited voluntary disclosure of oil and gas firms. We examine the implications of this disclosure rule on unexplained trading volume and market liquidity. Relying on the theoretical framework of Kim and Verrecchia (1994), the analysis assumes that the rule is an exogenous shock that increased the precision of disclosed information. Based on a sample of current filings, we find indications that on average, after the new regulation came into effect, filings of oil and gas firms generated less unexplained trading volume than they had prior to the regulation. A possible interpretation of these findings is a decline in investor disagreement following the rule. We also find that liquidity around current filings of oil and gas firms increased following the disclosure rule. Moreover, some results indicate that differences in unexplained trading volume associated with the characteristics of the filing firm or of the filing itself prior to the rule were moderated after it came into effect.

Keywords: voluntary disclosure, precision of disclosure, unexplained trading volume, investor disagreement, liquidity

JEL Classification: G10, G12, M48

Suggested Citation

Abudy, Menachem (Meni) and Shust, Efrat, What Happens to Trading Volume When the Regulator Bans Voluntary Disclosure? (July 10, 2019). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3423542

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Efrat Shust (Contact Author)

The Department of Management and Economics, The Open University of Israel ( email )

Israel

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