How Disclosure Quality Affects the Long-Run Level of Information Asymmetry

This study examines how disclosure quality is related to the long-run level of information asymmetry. We examine two potential mechanisms through which disclosure quality is expected to reduce the long-run level of information asymmetry: (1) disclosure quality will alter the trading incentives of investors and lead to relatively less trading by privately informed investors, and (2) disclosure quality will reduce the incentives to search for private information and lead to fewer private information events. Our cross-sectional analyses take into account the potential endogeneity between disclosure quality and information asymmetry. The results indicate that each of the two hypothesized mechanisms give rise to the negative association between disclosure quality and information asymmetry. These results add to our understanding of how disclosure quality affects a firm's information and trading environments