The Effect Of Information Disclosure Quality On Liquidity Risk

Throughout the previous financial crisis, the outbreak has demonstrated a remarkable similarity, namely a sharp decline in market liquidity. The sudden lack of liquidity in the market lead to the transaction almost at a standstill, and beyond the expected liquidity shocks brought huge losses to investors. Investors generally prefer the securities with good liquidity. However, what liquidity crisis told investors is that they should not only focus on the level of liquidity when they purchase the stock, but also concerned about the liquidity risk that is the fall of securities due to the market liquidity unexpected change during the holding period or at the selling point. Liquidity risk has become one of the major risks faced by investors, so prevention and management of stock liquidity risk has important practical significance to improve the efficiency of investment.After twenty years of Chinese securities market development, information disclosure system has made great progress and has established a comprehensive information disclosure system. So this paper from the perspective of information disclosure, explore the impact of the information disclosure quality on liquidity risk. Basing on Pastor and Stambaugh(2003)measure, we use rolling regression to compute liquidity risk. From the perspective of the available information for investor decision-making, we use market trading information, financial statements and analysts’forecast to investigate the effect of information disclosure quality on liquidity risk. The empirical results show that higher information quality is associated with lower liquidity risk. Contrasting the three measures proxies of information disclosure quality, we find that investors using analysts’ forecast can better identify information disclosure quality. In addition, the negative effect of information disclosure quality on liquidity risk is positive and significant with the degree of market liquidity innovation, especially during a period of deterioration in market liquidity.This study shows that Chinese securities investors can take advantage of information disclosure to prevent and manage the liquidity risk of stock, and make the securities analyst a clear position in the information transfer process when investors use information to make investment decision. It is significant to further improve the information disclosure system, to regulate the securities analyst industry, to enhance the ability of market against the external shocks and to reduce the overall risk of the market.