Stock Market Microstructure Measures of Information Asymmetry are Related to Marketwide Information

Abstract

This paper studies the impact of macroeconomic news on the stock market microstructure measures of information asymmetry. The results show that, due to the daily changes in the information environment, daily information asymmetry has a global impact, though on annual basis, the information asymmetry measures have significantly positive relations with the firm specific cash flow news constructed by using Vuolteenaho's (2002) vector autoregressive model to decompose the individual stock return into cash flow and discount rate news. The daily information asymmetry measures we evaluated significantly increase during both the macroeconomic and the earnings announcement periods, which suggests the important role played by the macroeconomic news on the formation of information asymmetry. Stock information asymmetry measures also co-move with the stock market average and governement bond market information asymmetry measures, and the covariations are significantly larger during macroeconomic- and non-earnings-non-macroecomic-announcement periods than during the earnings announcement periods, suggesting that the macroeconomic news that influence all the firms in the economy mainly induces the covariations in information asymmetry. Furthermore, the results show that macroeconomic news is the important source of the global impact of information asymmetry for firms in both the same and different industries, while possibly correlated cash flow news affecting firms in the same industry is another source of the commonality of information asymmetry for firms within the same industry.

Keywords: Liquidity, private information-based trading, public news announcements

JEL Classification: E44, G14