(When) Does Transparency Hurt Liquidity?
48 Pages Posted: 7 Sep 2019
Date Written: September 3, 2019
Conventional wisdom suggests that transparency improves market liquidity. However, if greater public information incentivizes only a subset of investors to produce private information, it could exacerbate information asymmetry among investors and thereby reduce liquidity. To test this proposition, we examine the liquidity effects of a European regulation that requires banks to provide detailed disclosures about the individual loans underlying their mortgage-backed securities (MBSs). We find that the liquidity of treated MBSs declines by 14% post-regulation. By exploiting tranche seniority and collateral quality, we also document that the effect of transparency on liquidity non-monotonically varies with investors’ incentives to seek information.
Keywords: liquidity, transparency, securitization, information sensitivity, regulation, MBS
JEL Classification: G10, G21, G23, G28
Suggested Citation: Suggested Citation