Information Asymmetry and the Ex Ante Impact of Public Disclosure Quality on Price Efficiency and the Cost of Capital: Evidence from a Laboratory Market

Abstract

This paper examines the ex ante effects of public information quality on market prices and how such effects vary with information asymmetry among traders in a two-period experimental market. We vary public information quality by changing its precision and information asymmetry among traders by varying the distribution of private signals. We find high-quality public disclosure leads to increased price efficiency and decreased cost of capital in the pre-announcement period when information asymmetry is high. The impending high-quality public information increases the competition among informed traders, which leads prices to impound more private information and alleviates the adverse selection problems facing uninformed traders. Our study suggests building a high-quality public information environment (e.g., by adopting high-quality accounting standards or committing to transparent disclosure policies) would likely provide ex ante benefits for firms with significant adverse selection among traders.

Does tax return disclosure affect information asymmetry among investors?

“…The mere commitment to voluntary disclosure, even when no information has yet been disclosed, is often used by insiders to differentiate their firms from others, and this signal adds to the information set of outsiders (Akerlof 1970;Spence 1973Spence , 2002. The commitment to disclose has a permanent effect on information asymmetry, as it reduces agency costs (Baiman and Verrecchia 1996;Rock 2002;Stulz 2009;Verrecchia 1999) or changes the incentives of sophisticated investors to collect private information (Barron and Qu 2014;Brown et al 2004). 30 Regarding ex-post transparency reports, recall that mandatory disclosure contains only three numbers.…”

“…To test this expectation, I follow Bischof and Daske (2013) and partition mandatory disclosure firms according to whether they are also voluntarily committed to disclosure following the TTC. 30 In an experimental study, Barron and Qu (2014) argue that if informed investors know that a forthcoming public disclosure may decrease their information advantage, they will exploit private information more aggressively before the disclosure. The private information aggregation arising from increased competition among informed investors is further passed on to the market, which reduces information asymmetry.…”

Earnings Forecasts and Price Efficiency after Earnings Realizations: Reduction in Information Asymmetry through Learning from Price*

“…In a laboratory market, we control private information endowment, which determines the level of information asymmetry. Prior experimental studies find that price cannot fully aggregate private information when information asymmetry is high (e.g., Bloomfield 1996; Barron and Qu 2014). This opens up the opportunity for public information to improve price efficiency through improving private information aggregation.…”

Application of Red Mud in Wastewater Treatment

“…However, this method involves chemical consumption and increased sludge volume generation. In a word, these technologies demonstrate evident shortcomings, including inadequate removal of pollutants [32], high capital costs [33], considerable reagents or energy requirements [34], and generation of toxic sludge or other wastes requiring further safe disposal [35]. Adsorption is a common process in wastewater treatment technologies.…”