Why does public news augment information asymmetries?

Julio A. Crego

Journal of Financial Economics, 2020, vol. 137, issue 1, 72-89

Abstract: The arrival of a public signal worsens the adverse selection problem if informed investors are risk averse. Precisely, the public signal reduces uncertainty which boosts informed investors’ participation leading to a more toxic order flow. I confirm the model’s empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. The bid-ask spread of stocks related to oil doubles after the release and their volume increases by 32% regardless of the report’s surprise. Further, consistent with the model, implied volatility drops and insider’s trading increases after the report’s publication.

Keywords: Public information; News release; Asymmetric information; liquidity (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:137:y:2020:i:1:p:72-89

DOI: 10.1016/j.jfineco.2019.05.020

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