The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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DISCUSSION
Published: 07/01/1986 | DOI: 10.1111/j.1540-6261.1986.tb04537.x
ROBERT E. VERRECCHIA
Disclosure, Liquidity, and the Cost of Capital
Published: 09/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04620.x
DOUGLAS W. DIAMOND, ROBERT E. VERRECCHIA
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.