Replacement cost disclosures, information asymmetry and market-maker behaviour: Assessment through the bid-ask spread

Abstract

Until recently, the evaluation of the information events in accounting have been restricted to a study of their impact on the characteristics of stock prices (e.g., Ball & Brown, 1968; Beaver, 1968; Lev, 1988 ). Among others, Venkatesh & Chiang (1986) suggest an alternate method to evaluate such information events. Taking their lead, this study analyses an accounting disclosure event through its impact on market-maker behaviour. Specifically, this study empirically tests the perceived informativeness of Securities and Exchange Commission (SEC) mandated Replacement Cost (RC) disclosures made in 1976. Inference is made through a relatively new bid-ask methodology. Parametric and non-parametric tests indicate that for certain sample firms the market-maker does experience an increase in information asymmetry on the eve of RC disclosures. However, the results cannot be generalised across all firms using an overall probability test. This implies that, either the market already has reliable access to such information for certain firms, or information being disclosed is not useful for certain firms, possibly due to measurement errors in RC disclosures ( Shriver, 1987; Swanson, 1990 ). The results are in line with studies that find small but significant association between stock returns and RC disclosures (e.g., Bublitz, Frecka & McKeown, 1985; Peasnell, Skeratt & Ward, 1987; Skeratt & Thompson, 1984; and Lustgarten, 1982 ).