Disclosure Activity and the Stock Market Liquidity under the Regulation Fair Disclosure: A Comparison between SMEs and Large Firms

This paper investigates the impact of disclosure activity on the stock market liquidity under the Regulation Fair Disclosure in Korea. Economic theories generally support that more disclosures reduce the level of information asymmetry, increase stock liquidity, and thus decrease the costs of equity capital. A series of empirical studies examine the impact of disclosure policy, however, they mainly focus on the relationship between disclosure and costs of equity capital, but not on the relationship between disclosure and liquidity especially in Korea. Since the disclosure theory is driven with a joint hypotheses, it is needed to investigate the relationships by stage. Using various measures of market liquidity, this study finds that disclosure activity is positively related with market liquidity. And the comparative analysis shows that both SMEs and large firms have disclosure impacts, but they affect this relation differently. Various sensitivity tests show that the relation is robust. The findings of this paper have an implication that the impact of liquidity and also the impact of information environment (i.e., SMEs vs. large firms) should be considered in examining the relation between disclosure and costs of equity capital.