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Article
Publication date: 1 March 2005

Kam C. Chan and Chunyan Li

Prior studies find increased bid‐ask spread around earnings announcements of U.S. firms. These findings show that increased adverse selection cost is the dominant factor…

Abstract

Prior studies find increased bid‐ask spread around earnings announcements of U.S. firms. These findings show that increased adverse selection cost is the dominant factor affecting bid‐ask spread. Using a sample of foreign firms that are cross‐listed on Nasdaq as American Depositary Receipts, we find that there is significant decrease in bid‐ask spread around earnings announcements of these foreign firms. The results suggest that increased trading volume is the dominant factor affecting the bid‐ask spread of American Depositary Receipts around earnings announcements.

Details

Review of Accounting and Finance, vol. 4 no. 3
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 10 May 2013

Andros Gregoriou

The purpose of this paper is to investigate the impact of the components of the bid‐ask spread around earnings announcements on the London Stock Exchange using intraday…

Abstract

Purpose

The purpose of this paper is to investigate the impact of the components of the bid‐ask spread around earnings announcements on the London Stock Exchange using intraday data obtained from the ICV Marketeye database. The paper finds that the information asymmetry cost component significantly increases around the earnings announcements, while the inventory holding and order processing cost components significantly decrease around the same period. Specifically, the economic magnitude of the increase in the asymmetric cost component implies that earnings announcements significantly increase the total bid‐ask spread, even when they result in decreased inventory holding and order processing costs.

Design/methodology/approach

Liquidity in financial markets around earnings announcements in the London Stock Exchange obtained by bid‐ask spread decompositions.

Findings

This paper investigates the impact of earnings announcements on the components of the bid‐ask spread on the London Stock Exchange using intraday data. The fundamental conclusion from the empirical findings is that the bid‐ask spread increases once the earnings have been announced, because the market makers' increased concerns about asymmetric information is more pronounced, than the lower inventory and order processing costs due to the higher levels of trading volume. This empirical finding also holds when the earnings announcements are partitioned into positive and negative surprises.

Originality/value

This is the first paper to decompose the bid‐ask spread around earnings announcements on the London Stock Exchange. The paper uses a unique intraday dataset.

Details

Journal of Economic Studies, vol. 40 no. 2
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 2 November 2010

Roy Clemons

The purpose of this paper is to examine whether focused attention on a firm by an external organization, group, or influential analyst generates greater investor awareness…

Abstract

Purpose

The purpose of this paper is to examine whether focused attention on a firm by an external organization, group, or influential analyst generates greater investor awareness that can affect a firm's value and cost of capital. This study is motivated by contemporary research that provides support for the hypothesis that investors have limited attention. Prior studies have focused on how investors' limited attention has influenced their analysis of firm‐specific financial data. The studies have shown that investors may have limited attention and hence pay more attention to the more salient financial statement items. This paper extends this stream of research by empirically testing to determine if external sources attract investors' limited attention to a firm.

Design/methodology/approach

The paper examines the published monthly Center for Financial Research and Analysis (CFRA) research reports from 1998 through 2004 that identify firms experiencing operational problems and/or using unusual or aggressive accounting practices. To provide evidence that information appearing in CFRA research reports has not already been impounded into a firm's stock price prior to the publication of the CFRA research report, the paper tests for abnormal returns around the publication of the CFRA research reports. Second, to provide evidence that the firms' cost of capital decreases after the publication date of the CFRA research reports, the paper tests for a decrease in the bid‐ask spreads after firms appear on the CFRA research reports.

Findings

Support was found for the hypothesis that firms experience a significant decline in their market value in the days surrounding their appearance on the CFRA research reports. For a sample of 892 firms, the cumulative abnormal returns (CARs) for a two‐day window around a firm's appearance on a CFRA research report is −1.89 percent, and the CARs for a seven‐day window around a firm's appearance on a CFRA research report is −3.50 percent.

Originality/value

The paper's findings suggest that the information from the fundamental analysis conducted by the Center for Financial Research and Analysis has not already been impounded into a firm's stock price before its appearance on a CFRA research report. Although the paper found a decrease in the mean difference in the bid‐ask spread change, it cannot provide statistically significant support for the hypothesis that a firm's cost of capital decreases after appearing on a CFRA research report.

Details

Review of Accounting and Finance, vol. 9 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 5 August 2021

Ajay Adhikari and Haiyan Zhou

This paper aims to exploit the varying level of responses to the carbon disclosure project (CDP) to assess the economic consequences of carbon emission disclosure by…

Abstract

Purpose

This paper aims to exploit the varying level of responses to the carbon disclosure project (CDP) to assess the economic consequences of carbon emission disclosure by disclosure level. Economic theory suggests that increased disclosures by a firm should lower the information asymmetry component of the firm’s cost of capital. Using CDP disclosures by US firms, the authors study the effect of voluntary carbon emission on the information asymmetry risk in capital markets.

Design/methodology/approach

The authors conduct cross-sectional analyses to examine whether, from the investor perspective, firms with varying CDP disclosure levels experience differential information asymmetric risk. The authors also conduct a pre- and post-disclosure comparison to examine whether the market responds to first-time carbon emission disclosure with decreases in the relative bid-ask spread.

Findings

In the cross-sectional analysis, the authors find that firms that decline to disclose carbon emission information, firms that provide incomplete information and firms that do not respond to the CDP survey have higher information asymmetry than firms that provide complete information and opt to make it available to the public. Using a pre- and post-disclosure comparison, the authors find that the market responds to first-time carbon emission disclosure with decreases in the relative bid-ask spread. Additionally, only firms that participate, provide complete disclosures and opt to make it available to the public enjoy the largest reduction in bid-ask spreads, which is followed by firms that provide incomplete information. Other firms do not experience a reduction in information asymmetry.

Research limitations/implications

This study examines the impact of CDP disclosures on information asymmetry using a US sample. The results of the study may not be generalizable to other countries that have different institutional arrangements and settings.

Practical implications

The study has important social and policy implications. The findings on the role of carbon emission disclosures in reducing information asymmetry in the capital markets suggest the need for policymakers to promote greater carbon emission disclosures in the USA and other countries where such disclosures have been traditionally less emphasized. As to stakeholders, bringing corporate carbon emission disclosure in line with recommended guidelines will require them to exercise more direct stakeholder pressure to encourage firms to fully participate in the CDP project. This is particularly critical in settings of regulatory inaction and weak enforcement with respect to environmental policies and disclosure such as the USA.

Social implications

The results span the current gap between two broad perspectives on corporate social responsibilities. The traditional shareholder perspective argues that companies only participate in socially responsible activities which increase shareholder value, while an alternate perspective argues that companies also undertake social responsibilities to benefit society even at the cost of shareholders (Moser and Martin, 2012). The study demonstrates that the two perspectives are not always at odds, carbon emission disclosure not only provides important information on the corporate social responsibility of the firm but also contributes to enriching the information environment leading to reduced information asymmetry in the equity markets for US firms. Thus, from both a stakeholder and capital market perspective, firms have incentives to provide carbon emission disclosures voluntarily. More direct stakeholder pressure may be helpful to encourage more firms to provide complete carbon emission information and opt to make it available to the public.

Originality/value

Few studies investigate the impact of CDP disclosure on the information environment of public companies. The lack of research on this key connection between new disclosures on carbon emissions and information asymmetry in the capital markets is the primary motivation for the paper. The study also provides important insights on disclosure level; just participating in the CDP survey is not enough, the degree of participation is also important. The results of the study suggest that the varying level of disclosure matters, the greatest benefits in terms of reduction of information asymmetry accrue to firms that provide complete information and opt to make it available to the public.

Details

Sustainability Accounting, Management and Policy Journal, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2040-8021

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Book part
Publication date: 22 October 2019

David Mutua Mathuva, Mumbi Maria Wachira and Geoffrey Ikavulu Injeni

In this chapter, we examine whether corporate environmental reporting (CER) by listed companies in Kenya improves stock liquidity. The investigation is motivated by the…

Abstract

Purpose

In this chapter, we examine whether corporate environmental reporting (CER) by listed companies in Kenya improves stock liquidity. The investigation is motivated by the growing interest by corporations, investors, and regulators toward embracing ecological protection with a view to creating sustainable societies for the future.

Design/Methodology/Approach

Using a panel dataset comprising of 244 firm-year observations from 50 listed firms in Kenya over a five-year period (2011 to 2015), we perform fixed-effects regressions to discern whether CER is associated with stock liquidity. To examine this, we utilize bid-ask (as well as quoted) spreads measured over month −9 to month +3 relative to a firm’s year end.

Findings

Despite the seemingly low levels of CER across firms in the sample (average: 32.6%), the results depict that CER is positively associated with stock liquidity. The results are robust even when we consider changes in bid-ask spreads and CER together with the other variables. The same results emerge when we study the association between bid-ask spreads and each CER item at a time over the period 2011–2015.

Practical Implications

The results imply that listed companies in Kenya that engage in higher CER seem to be more attractive to investors. The higher CER seems to improve the information environment, hence reducing information asymmetry and therefore attracting investors. The results provide some evidence of positive economic consequences of engaging in additional disclosure over and above the traditional corporate financial reporting.

Originality/Value

The study adds onto the dearth of literature on the economic consequences of embracing additional disclosure frameworks in developing countries where the adoption of alternative reporting frameworks is at infancy.

Details

Environmental Reporting and Management in Africa
Type: Book
ISBN: 978-1-78973-373-0

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Article
Publication date: 20 February 2009

T. Shawn Strother, James W. Wansley and Phillip Daves

The purpose of this paper is to investigate how quotes originating via electronic communication networks (ECN)s affect trading costs.

Abstract

Purpose

The purpose of this paper is to investigate how quotes originating via electronic communication networks (ECN)s affect trading costs.

Design/methodology/approach

In order to investigate the relations between trading costs and quotation venue, the bid‐ask spread is decomposed into its theoretical cost components associated with adverse selection, inventory handling, and order processing.

Findings

Stoll's adverse selection costs of ECN‐originated quotes relate positively to effective spreads, while Lin et al.'s adverse selection costs relate negatively to effective spreads.

Originality/value

The paper shows how trading costs relate to trading venue choice by decomposing the bid‐ask spread.

Details

International Journal of Managerial Finance, vol. 5 no. 1
Type: Research Article
ISSN: 1743-9132

Keywords

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Book part
Publication date: 29 November 2012

Andrew Lepone, Reuben Segara and Brad Wong

This study investigates whether broker anonymity impairs the ability of the market to detect informed trading in the lead up to takeover announcements. Our research…

Abstract

This study investigates whether broker anonymity impairs the ability of the market to detect informed trading in the lead up to takeover announcements. Our research represents the first study in this area to analyse the effects of broker anonymity in the context of significant information asymmetry. Results indicate that informed traders are less detected, and therefore better off when broker identifiers are concealed. This finding has important policy implications for exchange officials deciding whether or not to reveal broker identifiers surrounding trades, especially considering that almost all prior research suggests that broker anonymity is correlated with improved liquidity.

Details

Transparency and Governance in a Global World
Type: Book
ISBN: 978-1-78052-764-2

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Article
Publication date: 24 April 2020

Lee M. Dunham and John Garcia

The purpose of this paper is to examine the effect of firm-level investor sentiment on a firm's share liquidity.

Abstract

Purpose

The purpose of this paper is to examine the effect of firm-level investor sentiment on a firm's share liquidity.

Design/methodology/approach

The authors use Bloomberg's firm-level, daily investor sentiment scores derived from firm-level news and Twitter content in a regression model to explain the variability in a firm's share liquidity.

Findings

The results indicate that improvements (deterioration) in investor sentiment derived solely from Twitter content lead to a decrease (increase) in the average firm's share liquidity. Results, although not as strong, are opposite for investor sentiment derived solely from news articles: improvements (deterioration) in news sentiment leads to an increase (decrease) in the average firm's share liquidity.

Research limitations/implications

The proxy for share liquidity is the bid-ask spread, which may be an imperfect measure of liquidity. The Amihud illiquidity measure was used as an alternative proxy and yield similar results. The results have important implications for investors in assessing the determinants of share liquidity.

Practical implications

The sample period covers four years (2015–2018), which is determined by the availability of the Bloomberg sentiment data.

Social implications

Investors increasing use of social media to express views on particular stocks and seek information that might be used in the investment decision-making process. The study links investor sentiment derived from social media (Twitter) to share liquidity.

Originality/value

By examining the relationship between a firm's sentiment and the firm's share liquidity, this paper advances the authors' understanding of the factors that drive a firm's share liquidity. To the authors' knowledge, this is the first study to link investor sentiment derived from firm-level news and Twitter content to a firm's share liquidity.

Details

Managerial Finance, vol. 47 no. 1
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 7 September 2015

Mark Russell

This paper aims to examine whether firms with high information asymmetry disclose more information under a continuous disclosure regime, and, second, the paper examines…

Abstract

Purpose

This paper aims to examine whether firms with high information asymmetry disclose more information under a continuous disclosure regime, and, second, the paper examines whether continuous disclosures reduce information asymmetry.

Design/methodology/approach

The study models relations between continuous disclosures and information asymmetry using ordinary least squares regression and two-stage least squares regression.

Findings

The study finds firms with high information asymmetry disclose more information. Further, the study finds that disclosure in the presence of high information asymmetry increases asymmetry. Finally, while bad news increases information asymmetry, the disclosure of firm-specific good and bad news is associated with reduced information asymmetry.

Originality/value

The paper identifies conditions under which Continuous Disclosure Regime increases information in markets and influences information asymmetry.

Details

Accounting Research Journal, vol. 28 no. 2
Type: Research Article
ISSN: 1030-9616

Keywords

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Article
Publication date: 20 April 2020

Nicola Moscariello, Pietro Fera and Ettore Cinque

By analyzing the relationship between discretionary accruals and information asymmetry throughout the latest global financial crisis, this paper deepens our understanding…

Abstract

Purpose

By analyzing the relationship between discretionary accruals and information asymmetry throughout the latest global financial crisis, this paper deepens our understanding of the effect of managerial discretion on the informativeness of earnings in the case of a negative exogenous shock in business fundamentals.

Design/methodology/approach

This paper examines the relationship between discretionary accruals and the bid–ask spread within the Italian Stock Exchange over the period of 2007–2012. The authors focus on one country in order to avoid systematic cross-country performance variation in discretionary accruals models, and they use the bid–ask spread as a proxy for information asymmetry.

Findings

This paper shows the role played by discretionary accruals in unblocking private information in the case of a negative exogenous shock in business fundamentals and finds a significant negative relationship between discretionary accruals and the bid–ask spread during the global financial crisis, although only limited to firms with strong corporate governance.

Research limitations/implications

Since the paper focuses on one country, the findings might not be necessarily generalizable. Moreover, the relatively small sample size could be another limitation.

Practical implications

This paper offers useful evidence to identify settings in which discretionary accruals increase the informativeness of earnings. Further, it suggests controlling for macroeconomic variables to mitigate the risk of an erroneous interpretation of discretionary accruals models.

Originality/value

This paper extends knowledge and collects new evidence on the information content of discretionary accruals by investigating the relationship between discretionary accruals and information asymmetry during a systemic crisis.

Details

Journal of Applied Accounting Research, vol. 21 no. 3
Type: Research Article
ISSN: 0967-5426

Keywords

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