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

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

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

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Information asymmetry and the ex ante impact of public disclosure quality on price efficiency and the cost of capital: Evidence from a laboratory market'. Together they form a unique fingerprint.

Cite this