(When) Does Transparency Hurt Liquidity?

45 Pages Posted: 7 Sep 2019 Last revised: 7 Jan 2021

See all articles by Karthik Balakrishnan

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business

Aytekin Ertan

London Business School

Yun Lee

Singapore Management University; London Business School

Date Written: February 26, 2020

Abstract

Conventional wisdom suggests that increases in public information improve market liquidity. However, if greater public information incentivizes only sophisticated investors to produce private information, it could exacerbate information asymmetry among investors and thus reduce liquidity. We explore this argument on a sample of mortgage-backed securities (MBSs) by using a recent European regulation that mandates complex disclosures about the individual loans underlying MBSs. We find that the liquidity of the debt tranches of disclosed MBSs declines by 23% post-regulation. Our inferences are stronger when the securities are harder to value and when the disparity in investor sophistication is higher. In contrast to these findings, we also find that the disclosures increase the liquidity of the equity tranches of the same MBSs. Overall, our evidence implies that the liquidity impact of enhanced public information varies with the nature of the asset in question; this effect is likely a function of the investors’ incentives for information production and price discovery.

Keywords: liquidity, disclosure, securitization, information sensitivity, regulation, MBS, ABS

JEL Classification: G10, G21, G23, G28

Suggested Citation

Balakrishnan, Karthik and Ertan, Aytekin and Lee, Yun, (When) Does Transparency Hurt Liquidity? (February 26, 2020). Singapore Management University School of Accountancy Research Paper No. 2021-126, Available at SSRN: https://ssrn.com/abstract=3447412 or http://dx.doi.org/10.2139/ssrn.3447412

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Aytekin Ertan (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Yun Lee

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

London Business School

Regent's Park
London, London NW1 4SA
United Kingdom

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