On Information Asymmetry Metrics
60 Pages Posted: 18 Jan 2001
Date Written: November 2000
The purpose of this paper is to provide a systematic empirical comparison of the different proxy variables used to measure information asymmetry. We construct different information asymmetry measures based on a firm's growth opportunities, the market microstructure of the firm's stock, and analysts' forecasts of a firm's earnings per share and examine their correlations under different sampling situations. We also study the ability of the microstructure-based measures, which can be calculated at any point in time, to detect trends in corporate finance proxies, which are measured quarterly. We find that the market microstructure measures tend to be highly correlated with one another. Moreover, they are related to firm characteristics that ex ante should be associated with information asymmetry. The market microstructure measures tend to be related to analyst forecast errors only for large, widely followed firms. Our results also indicate that monthly changes in the microstructure measures of information asymmetry are significantly correlated with annual changes in the corporate finance proxy variables.
Keywords: Information asymmetry, market microstructure, adverse selection costs, analyst forecasts, corporate finance
JEL Classification: G19, G39
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