Liquidity, Trade, and Investor-Identity Disclosure

48 Pages Posted: 28 Feb 2022

See all articles by Robert E. Verrecchia

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Christina Zhu

University of Pennsylvania - The Wharton School

Date Written: January 5, 2022

Abstract

This study tests whether disclosing a trader's identity dampens or stimulates subsequent trading volume based on the trader's reputation for being informed. While a reputation for being informed makes markets less liquid, thus inhibiting subsequent trade ("illiquidity effect"), the information others glean from informed trade might motivate subsequent trade ("information effect"). To study which of these countervailing forces dominates, we use a setting where mandated short-position disclosures in Europe reveal the trader's identity at the time of trade. Changes in bid-ask spreads are positively associated with several proxies for the short seller's reputation: the short seller is local, has higher returns from previous short sales, and is a hedge fund or investment adviser. Despite the positive association between reputation and illiquidity, we show that reputation motivates more subsequent trade. We also provide evidence that future price informativeness increases with trader reputation. Thus, our results support the notion that the "information effect" dominates the "illiquidity effect." Our study contributes to the literature by investigating the interaction among investor identification, adverse selection, and trade.

Keywords: trading volume, bid-ask spreads, sophisticated investors, short selling

JEL Classification: D82, D83, G12, G14, G15, G23

Suggested Citation

Verrecchia, Robert E. and Zhu, Christina, Liquidity, Trade, and Investor-Identity Disclosure (January 5, 2022). Available at SSRN: https://ssrn.com/abstract=4001932 or http://dx.doi.org/10.2139/ssrn.4001932

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

Christina Zhu (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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