Information Disclosure and Stock Liquidity: Evidence fromBorsaItaliana

Abstract

This article examines the effect of increased corporate information disclosure on stock liquidity. Using the adoption of International Financial Reporting Standards (IFRS) in Italy as a natural experiment we extend previous work examining the effect on one measure of liquidity-bid-ask spreads-to others, specifically depth and the price impact of transactions (or effective bid-ask spreads). Consistent with previous research we find that bid-ask spreads of stocks decline following the introduction of IFRS, which implies that stock liquidity increases for small traders. However, we also provide evidence that depth at the best quotes declines, which challenges the proposition that liquidity increases for large trades following an increase in disclosure. In additional tests, we find that effective bid-ask spreads of block trades also decline following the introduction of IFRS. Overall, this evidence confirms that stock liquidity for both small and large trades increases following an increase in corporate information disclosure.

Main Consequences of IFRS Adoption: Analysis of Existing Literature and Suggestions for Further Research

“…These studies analyze the effect of IFRS adoption by Australian companies (Bissessur & Hodgson, 2012), by UK companies (Christensen, Lee, & Walker, 2009; Horton & Serafeim, 2010; Brochet, Jagolinzer, & Riedl, 2013), by Italian companies (Frino, Palumbo, Capalbo, Gerace, & Mollica, 2013), by European companies (Armstrong, Barth, Jagolinzer, & Riedl, 2010;Platikanova & Perramon, 2012), by U.S. companies (Joos & Leung, 2013), and companies from various countries in the world (Covrig, DeFond, & Hung, 2007;Karamanou & Nishiotis, 2009;Khurana & Michas, 2011;Florou & Pope, 2012;Kim & Shi, 2012;Landsman, Maydew, & Thornock, 2012;Hong, 2013;Christensen, Hail, & Leuz, 2013).…”

Disclosure, Enforcement and the Valuation of Equity

“…(Eleswarapu et al 2004); (Ernstberger et al 2012); (Hope 2003)), especially for the introduction of the IFRS (e.g. (Brown et al 2014); (Byard et al 2011); (Christensen et al 2013); (Daske et al 2008); (Daske et al 2013); (Frino et al 2013); (Horton et al 2013); long-term studies corroborate most findings (e.g. (Core et al 2015); (Daouk et al 2006); (Dhaliwal et al 2014); (Fu et al 2012); (Meser et al 2015)).…”

Infrastructure Asset Reporting and Pricing Uncertainty in the Municipal Bond Market

“…Theory and prior literature suggest that when information asymmetry or uncertainty are lower, bid-ask spreads are also lower (Frino et al 2013;Coller and Yohn 1997;Welker 1995;Wittenberg-Moerman 2008), suggesting that larger bid-ask spreads signify uncertainty about an organization's value. This theory and prior literature suggest the following hypothesis: H1: Governments using the modified approach will have less bond pricing uncertainty, evidenced by narrower bid-spreads in secondary market trades than governments using traditional depreciation.…”

“…Prior literature on financial markets in the corporate sector indicates that bid-ask spreads are larger in higher information asymmetry environments (Wittenberg-Moerman 2008;Choi, Salandro, and Shastri 1988), and that bid-ask spreads decline with the introduction of policies that are likely to reduce or remove such asymmetry, or the uncertainty about the information advantage of one party over the other. Studies show a decline in bid-ask spreads after the introduction of International Financial Reporting Standards (Frino, Palumbo, Capalbo, Gerace, and Mollica 2013), the release of management forecasts (Coller and Yohn 1997), or that bid-ask spreads are lower in firms with strong disclosure policies (Welker 1995). Literature in this area recognizes that the spreads can be viewed as resulting from three different types of dealer costs: order processing costs, inventory-holding costs, and adverse information costs (Stoll 1989).…”