Voluntary disclosure, transparency, and market quality: Evidence from emerging market ADRs

Extant research has also documented the relatively inferior legal and political environment for governance that obtains in several emerging market countries. When firms from emerging markets cross-list their equity in major international markets they have to mandatorily improve their disclosure levels in accordance with the stringent requirements of regulators and stock exchanges. The work of Bacidore and Sofianos [Bacidore, J.M., Sofianos, G., 2002. Liquidity provision and specialist trading in NYSE-listed non-US stocks. Journal of Financial Economics 63 (1), 133-58] provides evidence that companies from emerging markets face much higher adverse selection costs when they trade their ADRs in the U.S. Using the recently available disclosure scores developed by Credit Lyonnais Securities Asia (CLSA), we find that companies from emerging markets that issue ADRs have significant cross-sectional differences. This finding suggests that firms have incentives to increase the level of voluntary disclosures. One such incentive could be their improved liquidity when they trade in markets, such as New York stock exchange and Nasdaq. Using a market microstructure framework, this paper examines empirically whether there exist cross-sectional differences in effective spread, depth and adverse selection component of spread that are related to disclosure quality. Our empirical evidence indicates that firms with higher disclosure scores have significantly lower adverse selection component of spread ceteris paribus. There appears to be an information premium for firms with lower disclosure quality. Voluntary disclosures by managers seem to have a beneficial impact on the firm's liquidity.