The Effect of Information Quality on Liquidity Risk

• Main Author: NG, Jeffrey
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Information quality; Earnings quality; Liquidity risk; Cost of capital; Disclosure; Accounting; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/soa_research/877; https://ink.library.smu.edu.sg/context/soa_research/article/1876/viewcontent/SSRN_id1097382.pdf
• Institution: Singapore Management University

I investigate whether information quality affects the cost of equity capital through liquidity risk. Liquidity risk is the sensitivity of stock returns to unexpected changes in market liquidity; recent asset pricing literature has emphasized the importance of this systematic risk. I find that higher information quality is associated with lower liquidity risk and that the reduction in cost of capital due to this association is economically significant. I also find that the negative association between information quality and liquidity risk is stronger in times of large shocks to market liquidity.