Information asymmetry and the ex ante impact of public disclosure quality on price efficiency and the cost of capital: Evidence from a laboratory market

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4 Citations (Scopus)

Abstract

This paper examines the ex ante effects of public information quality on market prices and how such effects vary with information asymmetry among traders in a two-period experimental market. We vary public information quality by changing its precision and information asymmetry among traders by varying the distribution of private signals. We find high-quality public disclosure leads to increased price efficiency and decreased cost of capital in the pre-announcement period when information asymmetry is high. The impending high-quality public information increases the competition among informed traders, which leads prices to impound more private information and alleviates the adverse selection problems facing uninformed traders. Our study suggests building a high-quality public information environment (e.g., by adopting high-quality accounting standards or committing to transparent disclosure policies) would likely provide ex ante benefits for firms with significant adverse selection among traders.

Original languageEnglish (US)
Pages (from-to)1269-1297
Number of pages29
JournalAccounting Review
Volume89
Issue number4
DOIs
StatePublished - Jul 1 2014

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Public disclosure
Traders
Public information
Information asymmetry
Price efficiency
Disclosure quality
Cost of capital
Adverse selection
Information quality
Private information
Market price
Information environment
Experimental markets
Informed traders
Preannouncements
Accounting standards
Disclosure policy

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "This paper examines the ex ante effects of public information quality on market prices and how such effects vary with information asymmetry among traders in a two-period experimental market. We vary public information quality by changing its precision and information asymmetry among traders by varying the distribution of private signals. We find high-quality public disclosure leads to increased price efficiency and decreased cost of capital in the pre-announcement period when information asymmetry is high. The impending high-quality public information increases the competition among informed traders, which leads prices to impound more private information and alleviates the adverse selection problems facing uninformed traders. Our study suggests building a high-quality public information environment (e.g., by adopting high-quality accounting standards or committing to transparent disclosure policies) would likely provide ex ante benefits for firms with significant adverse selection among traders.",
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