Disclosure, Liquidity, and the Cost of Capital

Abstract

This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making. 'Given the assumption, one could even close the secondary market for an arbitrarily long time in the future without influencing the current price. As a security becomes less liquid in these models, more of the security is permanently held by the market makers who do not care about liquidity. THIS PAPER STUDIES THE causes and

Influence of Intellectual Capital Investment, Risk, Industry Membership and Corporate Governance Mechanisms on the Voluntary Disclosure of Intellectual Capital by UK Listed Companies

“…The first is explained by Diamond and Verrecchia (1991) and Fu, Kraft, & Zhang (2012), who suggest that voluntary disclosure of IC reduces information asymmetry between uninformed and informed investors and thus increases the liquidity of the equity in the market, both by reducing information risk and the inherent risk of the security. The second factor relates to the availability of information to analysts; Lang and Lundholm (1996) argue that not all management information is revealed and therefore analysts may invest in information collection costs, however as voluntary disclosure lowers the cost of information acquisition management may be motivated to increase the amount of information available to analysts in order to ensure the quality of the forecasts (Lehavy, Li, & Merkley, 2011).…”

Investment in Employees and Research and Development and the Signalling of Intellectual Capital by UK Listed Companies

“…The first is explained by Diamond and Verrecchia (1991), who suggest that voluntary disclosure reduces information asymmetry between uninformed and informed investors. The second factor relates to the availability of information to analysts; Lang and Lundholm (1996) argue that not all management information is revealed and therefore analysts may invest in information collection costs.…”

The Effect of Changing the Listing Level on the Information Environment of ADRs

“…In fact, Lang, Lins, and Miller (2003) find that the improved information environment associated with cross listing increases the accuracy of analyst forecasts of earnings. This issue is motivated by the economic theory that greater disclosure lowers the information asymmetry (e.g., Glosten andMilgrom 1985 andDiamond andVerricchia 1991) and the estimation risk (e.g., Barry and Brown 1985).…”

“…First, various studies emphasize the role of information asymmetry and differential information processing by investors in evaluating price and volume reactions to public information announcements which eventually provides investors on the information environment of the firm (Diamond and Verrecchia, 1991;Kim and Verrecchia, 1991;Harris and Raviv, 1993;Kandel and Pearson, 1995). These studies show that the reaction to an earnings announcement is an increasing function of both the magnitude of the price reaction and in the case of this study, the level of information asymmetry among investors.…”