The Impact of an SEC-Induced Increase to Stock Liquidity on Voluntary Disclosure

46 Pages Posted: 5 Mar 2021

See all articles by Thomas C. Hagenberg

Thomas C. Hagenberg

Indiana University - Kelley School of Business - Department of Accounting

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Anish Sharma

Indiana University - Kelley School of Business - Department of Accounting

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: January 4, 2021

Abstract

In addition to disclosure regulation, the Securities and Exchange Commission (SEC) periodically intervenes in the market making process to facilitate fair, orderly, and efficient capital markets. For example, responding to calls for increased market maker competition on the Nasdaq in the early 1990s, the SEC imposed several reforms in 1997 to decrease bid-ask spreads and dealer rents. While prior research documents that this reform was successful in improving market maker competition and stock liquidity, we examine whether this increase in liquidity sufficiently altered firm’s incentives to disclose, such that firms reduced voluntary disclosure. In a differences-in-differences design, we examine whether firms affected by the reforms subsequently reduced their voluntary disclosure and whether this reduction in disclosure increased information asymmetry among investors. Our results suggest that firms impacted by the regulatory intervention subsequently reduced management forecast frequency relative to a set of firms unaffected by the regulation. Further, the firms that reduced disclosure experienced an increase in information asymmetry among investors through an increased probability of informed trading.

Keywords: Voluntary Disclosure, Stock Liquidity, Information Asymmetry

JEL Classification: D82, G14, G18, M41

Suggested Citation

Hagenberg, Thomas and Miller, Brian P. and Sharma, Anish and Yohn, Teri Lombardi, The Impact of an SEC-Induced Increase to Stock Liquidity on Voluntary Disclosure (January 4, 2021). Available at SSRN: https://ssrn.com/abstract=3761177 or http://dx.doi.org/10.2139/ssrn.3761177

Thomas Hagenberg

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Brian P. Miller (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

Anish Sharma

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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