(When) does transparency hurt liquidity?
Subject
Accounting
Publishing details
Social Sciences Research Network
Authors / Editors
Balakrishnan K; Ertan A; Lee Y
Biographies
Publication Year
2019
Abstract
Conventional wisdom suggests that transparency improves market liquidity. However, if greater public information incentivizes only a subset of investors to produce private information, it could exacerbate information asymmetry among investors and thereby reduce liquidity. To test this proposition, we examine the liquidity effects of a European regulation that requires banks to provide detailed disclosures about the individual loans underlying their mortgage-backed securities (MBSs). We find that the liquidity of treated MBSs declines by 14% post-regulation. By exploiting tranche seniority and collateral quality, we also document that the effect of transparency on liquidity non-monotonically varies with investors’ incentives to seek information.
Keywords
Liquidity; transparency; securitization; information sensitivity; regulation; MBS
Series
Social Sciences Research Network