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Does Earnings Quality Affect Information Asymmetry? Evidence From Trading Costs, Nilabhra Bhattacharya, Hemang Desai, Kumar Venkataraman
Does Earnings Quality Affect Information Asymmetry? Evidence From Trading Costs, Nilabhra Bhattacharya, Hemang Desai, Kumar Venkataraman
Research Collection School Of Accountancy
Information asymmetry in financial markets relates to the idea that one party to a transaction has better information than the other. Since financial reporting involves the transmission of value-relevant enterprise information, we investigate whether the quality of reported earnings can contribute to differentially informed financial market participants. Higher information asymmetry is costly as it increases the adverse selection risk for market participants and lowers liquidity. For a large sample of NYSE and NASDAQ firms, we show that (i) poor earnings quality is significantly and incrementally associated with higher information asymmetry, (ii) earnings quality disproportionately affects information asymmetry for firms with …