Post by Sapphire Capital on Aug 26, 2008 20:22:50 GMT 4
The Effect of Information Quality on Liquidity Risk
Jeffrey Ng
MIT Sloan School of Management
July 21, 2008
Abstract:
I investigate whether information quality affects cost of capital through liquidity risk, where liquidity risk is the covariation between returns of a stock and changes in equity market liquidity. The empirical evidence indicates that higher quality reported earnings and management earnings forecasts lower liquidity risk and that the reduction in cost of capital due to the lower liquidity risk is economically significant. Further analysis provides some evidence that the effect of higher information quality in lowering liquidity risk is less for stocks in trading environments with greater adverse selection. This suggests that higher quality information is less effective in lowering liquidity risk when some investors actively make use of the information to trade against other investors. Finally, there is some evidence that more information intermediation by analysts increases the effectiveness of firm disclosures of higher quality in lowering liquidity risk.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1166901_code112917.pdf?abstractid=1097382&mirid=1
Jeffrey Ng
MIT Sloan School of Management
July 21, 2008
Abstract:
I investigate whether information quality affects cost of capital through liquidity risk, where liquidity risk is the covariation between returns of a stock and changes in equity market liquidity. The empirical evidence indicates that higher quality reported earnings and management earnings forecasts lower liquidity risk and that the reduction in cost of capital due to the lower liquidity risk is economically significant. Further analysis provides some evidence that the effect of higher information quality in lowering liquidity risk is less for stocks in trading environments with greater adverse selection. This suggests that higher quality information is less effective in lowering liquidity risk when some investors actively make use of the information to trade against other investors. Finally, there is some evidence that more information intermediation by analysts increases the effectiveness of firm disclosures of higher quality in lowering liquidity risk.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1166901_code112917.pdf?abstractid=1097382&mirid=1