is one that is easy to buy and sell without moving the price much, which sounds like a clear advantage for investors. To test whether it is, a change in trading rules that made certain shares more liquid was used, and what happened to them afterwards compared. What went up instead?
Crash risk went up. Higher liquidity was linked to a greater risk of a sharp price fall, even though it is usually treated as a clear advantage for investors. The relationship is not immediate but cumulative. The explanation the authors offer: managers fear will sell quickly on , so they delay publishing it. When the information finally comes out at once, the price can drop.
Liquidity is usually a desirable property: it saves costs for an investor who wants to buy or sell. The work asked whether it also changes the behavior of a company’s managers.
The move to trading in changed liquidity for reasons that did not necessarily arise from any company’s situation. That is a better way to test a direction of effect than simply comparing different shares.
In more liquid companies there was a higher risk of a future crash and more publications of disappointing profits, alongside selling by short-term investors.
The data fit a story of delayed bad news, and they do not prove that every fall was caused by deliberate concealment. They do teach that incentives around disclosure matter.
wat. Easier trading in shares was linked in one study to more sharp falls, perhaps because bad news gets delayed and accumulates.
wat wat
An advantage for the investor at the moment of selling can create a worse incentive for whoever decides when to disclose information about a company.
How do we know?
The authors used the move to trading in smaller price increments in the United States, an external change that raised liquidity, and compared crash risk.
What is still unknown
The mechanism of hiding news is an interpretation supported by patterns of reporting and selling, not a direct record of any manager’s decisions.
Learn something?
Where to next
Does the choice of a share pass between neighbors?markets
Can the ability to bet against a share restrain financial reporting?markets
How can most shares lose to Treasury bills while the market still rises?markets