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 information 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 statements and vice versa. Thus, the new disclosure requirement did not necessarily improve the information asymmetry and liquidity of firms, but instead helped good and bad firms form a case for a separating signaling equilibrium.
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