CHICAGO--(University of Chicago Booth School of Business has found a statistically significant relationship between greater dissemination of company-generated news and corresponding capital market benefits, including lower bid-ask spread, increased trading volume and lower idiosyncratic volatility.)--A new study by a researcher at the
“The more broadly information is diffused to investors, the more investors whom will be aware of this information. Consequently, greater dissemination of firm news is hypothesized to lower information asymmetry (and, by extension, a firm's bid-ask spread).”
Eugene Soltes, a doctoral candidate, worked closely with faculty at the prestigious business school. He interviewed senior editors and executives at leading business media and market-moving news services, including The Wall Street Journal, Thomson Reuters, Dow Jones Newswires, and Business Wire, in preparation for his exhaustive research project.
Focusing on the post-Regulation FD period from January 1, 2001 to December 2006, Soltes analyzed 9.3 million articles in his pioneering study, which goes beyond the survey parameters of previous disclosure-related research.
"I find that greater dissemination causally leads to lower spreads, increased share turnover, and lower idiosyncratic volatility," concludes Soltes. "Ultimately, the results suggest that how information is distributed, even when public, is important."
Soltes' findings mirror to a degree earlier studies that demonstrated that more frequent disclosure resulted in improved liquidity.
"Greater dissemination of firm news has the opportunity to broaden a firm's base by attracting investors that were not previously familiar with the firm," observed Soltes. "The more broadly information is diffused to investors, the more investors whom will be aware of this information. Consequently, greater dissemination of firm news is hypothesized to lower information asymmetry (and, by extension, a firm's bid-ask spread)."
Citing an earlier study that suggests that the cost of capital is greater for firms with wider spreads, Soltes concludes: "Thus, a reduction in trading costs due to greater dissemination may also contribute to a lower cost of capital."
Soltes is currently a PhD candidate at the University of Chicago, Booth School of Business. His research interests include financial media and strategic disclosure. Prior to beginning his studies at the University of Chicago, Eugene completed his bachelor's degree in economics and his master's degree in statistics at Harvard University. Funding for this research has graciously been provided by the Booth School of Business and the Charles T. Horngren Fellowship.