Exogenous stock liquidity improvements and voluntary disclosure

We study whether exogenous improvements in stock liquidity, unrelated to the information environment, affect managers’ disclosure choices. We exploit the 1997 Nasdaq reforms, which exogenously improved stock liquidity by reducing the non-information asymmetry components of the bid-ask spread, and find that Nasdaq firms reduced voluntary disclosure relative to a control group of unaffected firms. This evidence is consistent with managers substituting between components of the bid-ask spread when forming disclosure choices. Specifically, as the non-information asymmetry components decline, managers respond by decreasing disclosure, which in turn raises the information asymmetry component. Despite the reduction in disclosure and corresponding increase in information asymmetry, total stock liquidity nevertheless improves, suggesting that maintaining prior disclosure levels would have yielded minimal marginal benefits.