Accounting Information and Bid-Ask Spreads.

In this article, we survey the research on the relation between accounting information and bid-ask spreads. The bid-ask spread is a cost of transacting in the stock market. The bid-ask spread is set by the dealer(s) for a firm's stock. The dealer for a stock states bid prices at which he is willing to buy and ask prices at which he is willing to sell the stock. He then stands ready to buy or sell at these quoted prices. Research on bid-ask spreads suggests that the spread is comprised of three types of costs facing the dealer: order-processing costs, inventory holding costs and adverse selection costs. The adverse selection component of the spread reflects the degree of "information asymmetry risk" perceived by the dealer. Research has examined bid-ask spreads in order to yield insight into how accounting information affects information asymmetry in the stock market. This article addresses that literature. First, we present a survey of academic studies related to bid-ask spreads and the effect of accounting information on these spreads. We then analyze the gaps in this research and discuss the challenges and opportunities facing prospective researchers seeking to contribute to this literature. Finally, we consider the implications of these research findings for firm managers and accounting regulators.