THE EFFECT OF MANDATORY DISCLOSURE DISSEMINATION ON INFORMATION ASYMMETRY: EVIDENCE FROM THE IMPLEMENTATION OF THE EDGAR SYSTEM

I study the effect of the implementation of the SEC’s EDGAR system on two unique forms of information asymmetry: (1) asymmetry between managers and investors, and (2) asymmetry among different groups of investors. Information asymmetry theory suggests that firms’ adoption of the EDGAR system can have two effects—one that benefits investors and one that is detrimental to at least some investors. I find that the implementation of EDGAR lowered information asymmetry between managers and investors but had the unintended consequence of increasing information asymmetry (i.e., widening the information gap) between more- and less-sophisticated investors. I also validate Kim and Verrecchia’s (1997) measure of information asymmetry among investors. Taken together, my results suggest that while EDGAR was beneficial to investors, it also benefited some investors at the expense of others. Moreover, employing only traditional information asymmetry measures (e.g., bid-ask spreads) does not provide a complete picture of the consequences of disclosure.