Review of Accounting Studies

, Volume 12, Issue 2–3, pp 443–477 | Cite as

How disclosure quality affects the level of information asymmetry

  • Stephen Brown
  • Stephen A. Hillegeist


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.


Disclosure quality Information asymmetry Informed trading Private information events 

JEL Classifications

M41 D82 G14 



This paper has benefited from the comments and suggestions of Eli Bartov, Sudipta Basu, George Benston, Tarun Chordia, Yonca Ertimur, Paul Fischer, Simon Gervais, Wayne Guay, Frank Heflin, Ole-Kristian Hope, Ravi Jagannathan, Stephen Monahan, Joseph Paperman, Gideon Sarr, Yong-Chul Shin, Sri Sridhar, Beverly Walther, Greg Waymire, and seminar participants at the University of Chicago, Emory University, Georgia State University, the University of Illinois at Chicago, the University of Michigan, the University of Minnesota, New York University, Northwestern University, and conference participants at the 4th Winter Accounting Conference (University of Utah) and the 2006 Review of Accounting Studies Conference (INSEAD) and anonymous referees. The second author gratefully acknowledges the financial support of the Accounting Research Center at Northwestern University. We thank Mark Finn for his efforts on an earlier version of this paper; Christine Botosan, Russell Lundholm, Marlene Plumlee, and Mark Soszek for supplying the AIMR scores; IBES for making available the analyst forecast data; and Hennie Venter for assistance in implementing the extension of the EKO model.


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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

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