Opacity, Liquidity and Disclosure Policies

Andre Stenzel and Wolf Wagner ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. Our analysis suggests that uniform disclosure standards may be suboptimal; efficient disclosure can instead be achieved through a two-tier standard system or by subsidizing voluntary disclosure.

Keywords: disclosure requirements; liquidity; opacity; asymmetric information (search for similar items in EconPapers)
JEL-codes: G14 M40 M48 (search for similar items in EconPapers)
Pages: 54
Date: 2018-12
New Economics Papers: this item is included in nep-mst
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Related works:
Working Paper: Opacity and Liquidity (2015)
Working Paper: Asset Opacity and Liquidity (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2018_065

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