Information Asymmetry and Quarterly Disclosure Decisions by Firms: Evidence From the Tokyo Stock Exchange

• Author: Hitoshi Takehara,Keiichi Kubota
• Date: 01 March 2016
• DOI: http://doi.org/10.1111/irfi.12068
• Published date: 01 March 2016

Information Asymmetry and

Quarterly Disclosure Decisions by

Firms: Evidence From the Tokyo

Stock Exchange*

KEIICHI KUBOTA†AND HITOSHI TAKEHARA‡

†Graduate School of Strategic Management, Chuo University, Tokyo, Japan and

‡Graduate School of Finance, Accounting and Law, Waseda University, Tokyo, Japan

ABSTRACT

This study investigates whether the new quarterly disclosure reporting

requirement issued by the Tokyo Stock Exchange was related to the reduction

of the degree of private information-based trade and the liquidity of listed

stocks in Japan, or as a reverse causality, helped dichotomize good firms and

bad firms as a separating signaling equilibrium. We use the probability of

asymmetric information-based trade (Adjusted PIN) as a measure of informa-

tion asymmetry and the probability of symmetric order-flow shock (PSOS) as

a measure of market illiquidity. We use a sample of public firms from 2002 to

2007 that chose to either disclose or not disclose quarterly financial reports.

We find that the disclosing firms had lower information asymmetry

(Adjusted PIN), lower symmetric order-flow shocks (PSOS), and lower private

information-based trade (PIN). When we conduct further difference-in-

differences tests, we find that the firms with lower information asymmetry

and higher liquidity had a higher tendency to disclose their financial state-

ments and vice versa. Thus, the new disclosure requirement did not neces-

sarily improve the information asymmetry and liquidity of firms, but instead

helped good and bad firms form a case for a separating signaling equilibrium.

JEL Classifications: M41, M48, G14, C23

* We are indebted to late Kazuyuki Suda, who, to our regret, passed away in May 2011, for his

initial contribution to this paper as an original co-author. The paper was presented at the 2012

Econometric Society European Meeting, the 2012 European Accounting Association Conference,

the 2010 American Accounting Association Annual Meeting, 2010 Asian Finance Association

Annual Meeting, the 2010 Southwestern Finance Association Annual Meeting, the 2010 Japanese

Association of Financial Econometrics and Engineering Winter Meeting, the 2010 Northeast

Business and Economics Association Annual Meeting, the 2009 Japan Accounting Association

Meeting, the 2009 Asian Academic Accounting Association Meeting, and seminars at Thammasat

University, the University of Minnesota, Emory University,the University of Texas-Austin, Hong

Kong University of Science and Technology, and Musashi University. The authors thank Carl

Brousseau, Kalok Chan, Anchada Charoenrook, Darwin Choi, Tarun Chordia, Jonathan Cohn,

Sudipto Dasgupta, Mingcherng Deng, Zhaoyang Gu, Allaudeen Hameed, Jeniffer Huang, Junko

Maru, Andre Mechad, Nobuhiro Nakamura, Takashi Obinata, Sanae Ohno, Ehud Ronn, Mark

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DOI: 10.1111/irfi.12068

© 2015 International Review of Finance Ltd. 2015

International Review of Finance, 16:1, 2016: pp. 127–159

I. INTRODUCTION

There is abundant empirical evidence on the relationship between financial

statement information and asset prices from studies using the US and Japanese

data, but no study on Japan has ever investigated the role of interim financial

disclosure in the stock price discovery process using market microstructure data.

The Tokyo Stock Exchange (TSE) began to require the disclosure of quarterly

financial reports, with the minimum disclosure of prompt summary reports,

starting April 1, 2004 for firms listed on its First and Second Sections; this

provides us with a unique social experiment in which to assess the structural

change in the price discovery process of TSE stocks, triggered by this new

regulation.

Currently, the US and Japan are two of the few countries in the world that

require quarterly financial reports with auditors’ reviews. A majority of coun-

tries, including the UK, France, Germany, and Australia, still do not require

quarterly reports, while some countries, like Portugal and Sweden, have only

begun to require them. In Japan, the requirement by the TSE preceded the

enforcement of quarterly reports based on the formal interim reporting

accounting standards. This study focuses on the impact of the TSE regulation on

the price discovery process of the listed stocks. We believe this study gives

researchers important insights into the impact of quarterly reporting require-

ments on informational efficiency in capital markets.

As for the previous studies, those that use the US data provide empirical

evidence on quarterly report disclosure and the effect of the timing of interim

reports for as far back as the late 1960s. Using the US data from 1950 through

1973, for example, Butler et al. (2007) investigate firms that voluntarily

increased reporting frequencies and firms that abided by Securities and

Exchange Commission regulations, and find that the timeliness of the former

firms’ reporting improved, while that of the latter did not. Using international

evidence, Mensah and Werner (2008) show that price volatility was higher in

countries with quarterly reporting, like the US and Canada, than in countries

with semi-annual reporting, such as the UK and New Zealand. Thus, the results

are mixed. Using quarterly data, Duarte et al. (2008) investigate the changes in

the level of the market microstructure variable probability of information-based

trade (called PIN; Easley et al. 1996) before and after the enactment of the

Regulation Fair Disclosure, and Ahmed and Schneible (2007) investigate the

effect of the same regulation on the volatility of stocks. Because this study tries

to investigate the impact of the TSE’s new disclosure requirement of quarterly

Ruchwalski, P. K. Sen, Jay Shanken, Clemens Sialm, Sheridan Titman, Michael Trachtenbeg, Yuri

Tserlukevich, John K.C. Wei, and Soonjin Yim for useful comments. The authors also thank

Yasuhiro Arikawa, Thierry Foucault, Kosuke Oya, Christine Parlour, and Jun Uno for useful

discussion. The authors acknowledge financial support from the Grant-in-Aid for Scientific

Research [(A) 21243029 and 25245052 and (C) 19530419] from the Ministry of Education,

Culture, Sports, Science and Technology of Japan. The authors are responsible for all remaining

errors.

International Review of Finance

© 2015 International Review of Finance Ltd. 2015

128

reporting, it is in line with these two previous studies using the US data in the

sense that they are event studies that assess the effect of the new regulation on

the price discovery process and liquidity of stocks, which is an important

research agenda in market microstructure studies (O’Hara 2003; Foucault et al.

2013). In addition, no study has dealt with the impact of interim reporting in

the Japanese context using the market microstructure variables that we use.

The current study investigates whether the new quarterly disclosure report-

ing requirement issued by the TSE effective April 1, 2004 was related to the

reduction of the degree of information asymmetry and the liquidity of listed

stocks in Japan, or, as a reverse causality, helped dichotomize good firms and

bad firms in the context of a separating equilibrium (Spence 1974; Bolton and

Dewatripont 2005).

For this purpose, we use tick-by-tick data of firms listed on the TSE and

investigate the impact of the new quarterly disclosure requirement on the price

discovery process of stocks. In addition, we use the following market micro-

structure variables. First, Easley et al. (1996) devise the variable PIN, and Easley

and O’Hara (2004) study the relationship between the degree of private infor-

mation and the cost of capital. Duarte et al. (2008) utilize PIN to assess the

impact of the Regulation Fair Disclosure on the US firms. Then, Duarte and

Young (2009) extend the PIN to disentangle the probability of asymmetric

information-based trade (Adjusted PIN) from the probability of trade occur-

rences resulting from a symmetric order-flow shock on both buy and sell orders

(probability of symmetric order-flow shock; PSOS). Both of these models are

based on the Poisson information arrival process, and the ex post PIN, Adjusted

PIN, and PSOS can be computed with Bayes’ rule.

In this study, we use the Adjusted PIN and PSOS proposed by Duarte and

Young (2009), who extended the PIN by Easley et al. (1996, 2002), and inves-

tigate whether the new disclosure requirement helped improve relative distri-

butions of public information relative to private information among all TSE-

traded stocks after controlling for general economic and information shocks,

and in addition, conduct difference-in-differences (DD) and difference-in-

difference-in-differences (DDD) analyses.

Section II provides a background of the quarterly disclosure requirement by

the TSE and how firms followed this regulation. Note that this regulation did

not have an embedded penalty code until 2006 when the new Financial Instru-

ments and Exchange Act was enacted. Section III describes the basic market

microstructure variables used in this study, Adjusted PIN and PSOS, and the

interpretations of the empirical results for these variables. Section IV presents

Hypotheses 1–3, starting with a discussion of related previous studies. Section V

explains the data collection method and reports the basic statistics. Section VI

presents the analysis of the overall time-series behavior of the estimated

Adjusted PIN and PSOS. Section VII reports the results from cross-section regres-

sions, and Section VIII explores the sample selection issue and interprets the

results from further analyses of the controlled period data from the viewpoint

of a separating signaling equilibrium. Section IX presents the conclusions.

Interim Reporting TSE

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