Review of Accounting Studies

, Volume 12, Issue 2, pp 443–477

How disclosure quality affects the level of information asymmetry

Article

DOI: 10.1007/s11142-007-9032-5

Cite this article as:
Brown, S. & Hillegeist, S.A. Rev Acc Stud (2007) 12: 443. doi:10.1007/s11142-007-9032-5

Abstract

We examine two potential mechanisms through which disclosure quality is expected to reduce information asymmetry: (1) altering the trading incentives of informed and uninformed investors so that there is relatively less trading by privately informed investors, and (2) reducing the likelihood that investors discover and trade on private information. Our results indicate that the negative relation between disclosure quality and information asymmetry is primarily caused by the latter mechanism. While information asymmetry is negatively associated with the quality of the annual report and investor relations activities, it is positively associated with quarterly report disclosure quality. Additionally, we hypothesize and find that that the negative association between disclosure quality and information asymmetry is stronger in settings characterized by higher levels of firm-investor asymmetry.

Keywords

Disclosure qualityInformation asymmetryInformed tradingPrivate information events

JEL Classifications

M41D82G14

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Department of AccountingGoizueta Business SchoolAtlantaUSA
  2. 2.INSEADAccounting and Control AreaFontainebleau CedexFrance