Accounting Numbers and Information Asymmetry: Evidence from Loss Firms

Abstract

This paper studies whether firms reporting losses subsequently experience higher levels of information asymmetry among investors relative to firms reporting profits. Using bid-ask spreads as a measure of information asymmetry, I test whether loss firms have higher bid-ask spreads than profit firms after controlling for determinants of bid-ask spreads as identified by previous literature. I also differentiate between loss firms based on the history of losses and test whether multiple loss firms experience higher bid-ask spreads than single loss firms. The results show that, on average, loss firms have higher bid-ask spreads than profit firms and multiple loss firms have higher bid-ask spreads than single loss firms. Furthermore, the documented positive association between losses and bid-ask spreads is not driven by firms in financial distress. These results suggest that losses may affect the efficient functioning of capital markets through higher levels of information asymmetry.