Abstract
The arrival of a public signal worsens the adverse selection problem if informed investors are risk averse. Precisely, the public signal reduces uncertainty which boosts informed investors' participation leading to a more toxic order flow. I confirm the model's empirical predictions by estimating the effect of the publication of the weekly change in oil inventories on liquidity via a difference-in-differences strategy. I show the mean bid-ask spread doubles immediately after the release and volume increases by 32 % regardless of the report's surprise. Further, in line with the model, implied volatility drops and insider's trading increases after the report's publication.
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