chiyachantana

7/29/2019 Chiyachantana

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Siraprapa Watakit

5502310013

The Impact of Regulation Fair Disclosure

on Information Asymmetry and Trading:An Intraday Analysis

Chiyachantana, Jiang, Taechapiroontong, Wood [2004]


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Agenda

Overview of The Paper

Contribution

Development of Hypotheses

Empirical Results Conclusion

2


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Overview of The Paper3

The paper study the impact ofRegulation 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


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Contributions4

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


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Development of Hypothesis5

FD

Liquidity

InformationAsymmetry

TradingBehavior

Retail

Institutional

Bid-Ask

Spread,

Depth

Trading.Freq

, Volume

Component

of Bid-Ask

Spread

Info.Asym

vs investors


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Hypothesis 1: Bid ask spreads are lower and depths aregreater before earnings announcements in the post-FD periodthan in the pre-FD period

Hypothesis 2a: The adverse selection component of the spreadis expected to be lower before earnings announcements in thepost-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 inthe post-FD period than in the pre-FD period

Improved

liquidity

lower

information

asymmetry


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Hypothesis 3a: Compared to the pre-FD period, the post-FD period has alower participation rate from institutions prior to earnings announcements.

Hypothesis 3b: Compared to the pre-FD period, trading activities from retailinvestors are heightened after earnings announcements.

Hypothesis 4a: The change in adverse selection cost in the pre-announcementperiod post-FD is related to the change in institutional trading during thesame period.

Hypothesis 4b: The change in adverse selection cost after earnings releasespost- FD is related to the change in retail trading during the same period.

less institutional activity,

more retail activity

find linear relationship

between spread and

investor activity


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Data and Methods8

Earning announcement: CRSP

Transaction data: TAQ separate retail/institutional trades by size and dollar value cutoff

rules

pre-FD

(November 1,1999 to August

15, 2000)

Benchmark

half-hrs (-14days)

pre-announcement

half-hrs (-26,-1)

eventhalf-hrs (0,25)

post-FD

(October 23, 2000to July 31, 2001)

Benchmark

half-hrs (-14days)

pre-announcement

half-hrs (-26,-1)

eventhalf-hrs (0,25)


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Data and Methods9

Liquidity


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Empirical results10

Table 1: Trading.freq is high during pre-announce period for pre-

FD; but less for post-FD


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Empirical results11

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

H1:Improved

liquidity


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Empirical results12

Table 3: adv.select cost is high during pre-announcement period at

pre-FD; but decrease at post-FD

H2:lower

information

asymmetry


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Empirical results13

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

H3:less

institutional

activity, more

retail activity at

post-FD


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Empirical results14

Table 6: Dependent variable is The change in adverse selection

component between pre-FD and post-FD

H4:more institutionalmore

adv.selectcost, moreretailsless adv.select cost


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15

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; andhigher participation of retail investor

contribute to lower information risks

Conclusion

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