How Disclosure Quality Affects the Level of Information Asymmetry

53 Pages Posted: 12 Jan 2007

See all articles by Stephen Brown

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Abstract

We examine two potential mechanisms through which disclosure quality is expected to reduce information asymmetry: (1) altering the trading incentives of informed and uninformed investors so that there is relatively less trading by privately informed investors, and (2) reducing the likelihood that investors discover and trade on private information. Our results indicate that the negative relation between disclosure quality and information asymmetry is primarily caused by the latter mechanism. While information asymmetry is negatively associated with the quality of the annual report and investor relations activities, it is positively associated with quarterly report disclosure quality. Additionally, we hypothesize and find that that the negative association between disclosure quality and information asymmetry is stronger in settings characterized by high levels of firm-investor asymmetry.

Keywords: Disclosure Quality, Information Asymmetry, Informed Trading, Private Information Events

JEL Classification: M41, M45, D82, G14

Suggested Citation

Brown, Stephen and Hillegeist, Stephen A., How Disclosure Quality Affects the Level of Information Asymmetry. Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=956256

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Stephen A. Hillegeist (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

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