The Impact of Regulation Fair Disclosure on Information Asymmetry and Trading: An Intraday Analysis Chiyachantana, Jiang, Taechapiroontong, Wood

[2004]

Siraprapa Watakit 5502310013

Agenda
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Overview of The Paper Contribution Development of Hypotheses Empirical Results Conclusion

Overview of The Paper

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The paper study the impact of Regulation of Fair Disclosure (FD) towards 3 main focused topics Market liquidity, information asymmetry, trading behavior of retail and institutional investors The advocate of FD says that FD promote fair/openness to the market and reduce information asymmetry While the critics of FD argue that FD introduces more volatility to the market because it may reduce quantity and quality of information released by companies To investigate the effect of FD, the paper compares intraday activity during the earning announcement period at pre-FD and post-FD

Contributions
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Using trades and transaction data, the paper provides empirical evidences to support the finding results Major findings are FD improves market liquidity FD reduces information asymmetry At post-FD; the results show that intuitional investors activities decrease; while retail investors activities increase The decline in information asymmetry is +associated with institutional investors; and the higher participation of retail investor contribute to lower information risks

Development of Hypothesis
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Bid-Ask Spread, Depth

Liquidity FD Information Asymmetry Trading Behavior

Component of Bid-Ask Spread

Retail Institutional
Info.Asym vs investors

Trading.Freq , Volume

Development of Hypothesis
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Improved liquidity

Hypothesis 1: Bid ask spreads are lower and depths are greater before earnings announcements in the post-FD period than in the pre-FD period Hypothesis 2a: The adverse selection component of the spread is expected to be lower before earnings announcements in the post-FD period than in the pre-FD period. Hypothesis 2b: The adverse selection component of the spread is expected to be the same after earnings announcements in the post-FD period than in the pre-FD period
lower information asymmetry

Development of Hypothesis
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less institutional activity, more retail activity

Hypothesis 3a: Compared to the pre-FD period, the post-FD period has a lower participation rate from institutions prior to earnings announcements. Hypothesis 3b: Compared to the pre-FD period, trading activities from retail investors are heightened after earnings announcements. Hypothesis 4a: The change in adverse selection cost in the pre-announcement period post-FD is related to the change in institutional trading during the same period. Hypothesis 4b: The change in adverse selection cost after earnings releases post- FD is related to the change in retail trading during the same period.
find linear relationship between spread and investor activity

Data and Methods

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pre-FD (November 1, 1999 to August 15, 2000) post-FD (October 23, 2000 to July 31, 2001)

Benchmark half-hrs (-14days)

pre-announcement half-hrs (-26,-1)

event half-hrs (0,25)

Benchmark half-hrs (-14days)

pre-announcement half-hrs (-26,-1)

event half-hrs (0,25)

Earning announcement: CRSP Transaction data: TAQ separate retail/institutional trades by size and dollar value cutoff rules

Data and Methods

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Liquidity

Empirical results
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Table 1: Trading.freq is high during pre-announce period for preFD; but less for post-FD

Empirical results
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Table 2: spread decrease and depth wider at post-FD

H1:Improved liquidity

Empirical results
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Table 3: adv.select cost is high during pre-announcement period at pre-FD; but decrease at post-FD

H2:lower information asymmetry

Empirical results
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Table 4: at post-FD, more retail and less institutional

H3:less institutional activity, more retail activity at post-FD

Empirical results
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Table 6: Dependent variable is The change in adverse selection component between pre-FD and post-FD

H4:more institutionalmore adv.selectcost, more retailsless adv.select cost

Conclusion
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Major findings are FD improves market liquidity FD reduces information asymmetry At post-FD; the results show that intuitional investors activities decrease; while retail investors activities increase The decline in information asymmetry is +associated with institutional investors; and higher participation of retail investor contribute to lower information risks