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

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Disclosure, Liquidity, and the Cost of Capital

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