Three Essays on Accounting Disclosure and Information Environment

The first paper investigates the long-run effects of fair value level disclosures on the information environment. SFAS 157 introduced mandatory disclosures about three-level fair values in 2008. Using panel data of firms' quarterly disclosures and quarterly summarized daily stock trades, we find that a higher fraction of fair value levels 2 and 3 to total assets reduces information asymmetry in the equity market. Results are consistent with the view that more disclosures improve the information environment. Furthermore, we investigated the boundaries of the primary effect. The effect is less pronounced for firms with higher-quality ex-ante information environment. The higher is the presence of dedicated institutional investors among the shareholders, the positive effect of disclosure is more pronounced, which confirms the usefulness of SFAS 157 disclosures to the market participants. On the contrary, the effect of the disclosure on the bid-ask spread attenuates with transient institutional holdings, as they are more advantageous in analyzing the newly released sophisticated disclosure contents. Results hold for both financial and non-financial firms and are robust to various specifications and estimation methods. The second paper examines the effect of Fair value measurement levels according to SFAS 157 on information asymmetry among the U.S. corporate bonds market investors. We find that the bid-ask spread of bonds is positively associated with the ratio of total fair value to total asset, and its magnitude is higher for level 3 and level 2 assets. It implies that information asymmetry is more substantial for firms with more opaque financial assets. These results support the view that bondholders' non-linear payoff function makes them demand more conservative accounting practices. The result holds for both the financial and non-financial sectors and is robust to linear and log-linear specifications. The third paper studies the effect of financial reporting transparency on the liquidity creation function of banks. Recent theoretical models suggest that banks are secret keepers, and by keeping information about the firms secret, banks can provide money like safe liquidity to depositors. This model implies that transparency harms liquidity creation. The previous empirical literature has treated the asset and the liability sides of banks' balance sheets separately. This study aims at connecting the two sides and measuring the effect of assets transparency on liquidity transformation. Using CALL reports, I find that Delayed Expected Loss Recognition measure of opacity and CAT FAT measure of liquidity creation are negatively associated, most significant for small banks.