Cited by 3,836Corporate Finance and GovernanceFinancial Markets and Investment StrategiesAuditing, Earnings Management, Governance

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Disclosure, Liquidity, and the Cost of Capital

DIAMOND, DOUGLAS W., VERRECCHIA, ROBERT E.·1991·The Journal of Finance

DOI 10.1111/j.1540-6261.1991.tb04620.x

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Abstract

This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making.

Integrity signals

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Crossref · 10.1111/j.1540-6261.1991.tb04620.x

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Authors: DIAMOND, D. W., & VERRECCHIA, R. E.
Affiliations: Georgetown University (US)
ORCID: DIAMOND, DOUGLAS W.
VERRECCHIA, ROBERT E.
Venue: The Journal of Finance
Publisher: Wiley
Published: 1991-09
Volume: 46
Issue: 4
Pages: 1325-1359
ISSN: 0022-1082 (ISSN-L)
1540-6261
DOI: 10.1111/j.1540-6261.1991.tb04620.x
OpenAlex: W2154187126
Cited by: 3,836
References: 16
Citations by year: 2026: 219 · 2025: 232 · 2024: 228 · 2023: 188 · 2022: 198 · 2021: 215 · 2020: 201 · 2019: 165 · 2018: 189 · 2017: 199 · 2016: 181 · 2015: 190 · 2014: 198 · 2013: 182 · 2012: 157
FWCI: 13.32
Type: journal article
Language: en
Open access: closed
Licence: onlinelibrary.wiley.com/termsAndConditions#vor (vor, 7547 d)
Locations: The Journal of Finance (publishedVersion)
RePEc: Research Papers in Economics (submittedVersion)
Topics: Social Sciences › Economics, Econometrics and Finance › Finance › Corporate Finance and Governance
Social Sciences › Economics, Econometrics and Finance › Finance › Financial Markets and Investment Strategies
Social Sciences › Business, Management and Accounting › Accounting › Auditing, Earnings Management, Governance
Keywords: information disclosure, information asymmetry, cost of capital, liquidity, large investors, market makers, security prices, firm size, corporate finance

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Registry, retraction, Cites and statistics results are computed, not judged, with one exception: a printed reference that no index lists is read once by a model before it counts as a citation error. Claims are extracted by a model and kept only when their quote appears verbatim in the text; each cited source is then checked, with a model’s help, for whether it says what the claim relies on. Those verdicts can be wrong — read the claim’s quote and the cited source before relying on one.

Statistics and arithmetic are recomputed, not judged.

Confidence bands are shown only for fields calibrated on our annotated test set. None is calibrated yet, so no band is shown.

What counts as a claim ›How we measure confidence ›How we check this ›

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Disclosure, Liquidity, and the Cost of Capital

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