Does Earnings Quality Affect Information Asymmetry? Evidence from Trading Costs
54 Pages Posted: 15 Feb 2007 Last revised: 3 Jul 2013
There are 2 versions of this paper
Does Earnings Quality Affect Information Asymmetry? Evidence from Trading Costs
Earnings Quality and Information Asymmetry: Evidence from Trading Costs
Date Written: December 25, 2011
Abstract
Information asymmetry in financial markets relates to the idea that one party to a transaction has better information than the other. Since financial reporting involves the transmission of value relevant enterprise information, we investigate whether the quality of reported earnings can contribute to differentially informed financial market participants. Higher information asymmetry is costly as it increases the adverse selection risk for market participants and lowers liquidity. For a large sample of NYSE and NASDAQ firms, we show that (i) poor earnings quality is significantly and incrementally associated with higher information asymmetry, (ii) earnings quality disproportionately affects information asymmetry for firms with poor information environments, (iii) both innate and discretionary components of earnings quality increase information asymmetry, and (iv) poor earnings quality exacerbates the information asymmetry around earnings announcements. Our results suggest that the standard setters’ efforts to develop accounting standards that improve earnings quality should contribute to a better information environment for market participants and increase stock liquidity.
Keywords: Earnings Quality, Information Asymmetry, Liqudity, Cost of Capital
JEL Classification: G12, G14, M41, M43, M44
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Christine Botosan and Marlene Plumlee
-
By Christine Botosan and Marlene Plumlee
-
By Paul M. Healy and Krishna Palepu
-
Information and the Cost of Capital
By Maureen O'hara and David Easley
-
Toward an Implied Cost of Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
Toward an Ex Ante Cost-of-Capital
By William R. Gebhardt, Charles M.c. Lee, ...
-
The World Price of Insider Trading
By Utpal Bhattacharya and Hazem Daouk
-
The Market Pricing of Earnings Quality
By Jennifer Francis, Ryan Lafond, ...