The Impact of the SEC's Segment Disclosure Requirement on Bid-Ask Spreads
[Lev (1988) asserts that reducing inequities among investors should result in thicker markets with smaller bid-ask spreads and greater liquidity of securities. He claims that fuller disclosure should decrease inequities among investors by decreasing information asymmetries through equal access to information. It is argued that reducing information asymmetries should result in lower transaction costs as reflected in the bid-ask spread. This paper provides evidence on the effect of accounting disclosure on the size of the relative bid-ask spread. This study differs from previous studies in that it examines the effects of disclosure regulation on the market microstructure, not on earnings or risk predictability. The SEC's 1970 segment disclosure requirement is chosen because of the added information content due to more finely partitioned data being presented. Previous research on segment disclosure showed improved predictive accuracy of earnings forecasts (Kinney 1971; Barefield and Comiskey 1975; Collins 1976; Baldwin 1984), an increase in price variability surrounding the release of 10-K reports, and a decrease in divergence of beliefs (Swaminathan 1991). A random sample of firms listed on the NYSE as of fiscal year end 1970 is used. The results indicate that the relative bid-ask spread decreased more significantly in the period subsequent to the filing of the 1970 10-K reports for those firms reporting such information for the first time than for either a control group of firms or single-segment firms. For the experimental group, this downward shift in the relative bid-ask spread is shown to be a function of the number of segments reported. Overall, these findings provide limited evidence that the segment disclosure regulation may have an impact on the market microstructure as represented by bid-ask spreads.]