Disclosure policy and intraday spread patterns

Abstract

PurposeThe purpose of this paper is to study the relation between financial analysts’ ratings of firms’ disclosure policies and the intraday pattern in spreads between specialists’ bid and ask price quotes.Design/methodology/approachMeasure of the disclosure policy is based on financial analysts’ ratings of the quality of firms’ annual reports, quarterly and other information, and investor relations activities. The bid‐ask spread is the ask price minus the bid price. Time‐weighted bid‐ask spreads were measured over half‐hour trading intervals. Generalized method of moments is used to estimate regressions of bid‐ask spreads on disclosure policy ratings and controls for trading volume, price volatility, and share price.FindingsIt was found that spreads are uniformly lower for firms with higher‐rated disclosure policies in all half‐hour trading intervals during the day. In addition, increases in spreads in the first two half‐hours of trading are smaller for firms with higher‐rated disclosures. Finally, our evidence suggests spreads increase more in the last half‐hour of trading for firms with better disclosure policies, and subsequent tests suggest this is due to greater end‐of‐day liquidity trading.Research limitations/implicationsThese results suggest that disclosure policy is a determinant of both the level and pattern of intraday bid‐ask spreads. Firms with higher‐rated disclosure policies have a more liquid market for their shares, which is theoretically linked to a lower cost of capital. In addition, better disclosure mitigates the decrease in market liquidity typically observed at the open of daily trading.Practical implicationsBetter disclosures can help reduce market frictions.Originality/valueThis paper is the first to study the relation between disclosure policy and intraday spread patterns.