(When) Does transparency hurt liquidity?
Conventional wisdom suggests that increases in public information improve market liquidity. However, if greater public information incentivizes only sophisticated investors to produce private information, it could exacerbate information asymmetry among investors and thus reduce liquidity. We explore...
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| Main Authors: | , , |
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| Format: | text |
| Language: | English |
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Institutional Knowledge at Singapore Management University
2020
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| Online Access: | https://ink.library.smu.edu.sg/soa_research/1844 https://ink.library.smu.edu.sg/context/soa_research/article/2871/viewcontent/SSRN_id3447412.pdf |
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| Institution: | Singapore Management University |
| Language: | English |
| Summary: | Conventional wisdom suggests that increases in public information improve market liquidity. However, if greater public information incentivizes only sophisticated investors to produce private information, it could exacerbate information asymmetry among investors and thus reduce liquidity. We explore this argument on a sample of mortgage-backed securities (MBSs) by using a recent European regulation that mandates complex disclosures about the individual loans underlying MBSs. We find that the liquidity of the debt tranches of disclosed MBSs declines by 23% post-regulation. Our inferences are stronger when the securities are harder to value and when the disparity in investor sophistication is higher. In contrast to these findings, we also find that the disclosures increase the liquidity of the equity tranches of the same MBSs. Overall, our evidence implies that the liquidity impact of enhanced public information varies with the nature of the asset in question; this effect is likely a function of the investors’ incentives for information production and price discovery. |
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