THE IMPACT OF THE SECS SEGMENT DISCLOSURE REQUIREMENT ON BID-ASK SPREADS

Lev (1988) asserts that reducing inequities among investors should res ult in thicker markets with smaller bid-ask spreads and greater liquid ity of securities. He claims that fuller disclosure should decrease in equities among investors by decreasing information asymmetries through equal access to information. It is argued that reducing information a symmetries should result in lower transaction costs as reflected in th e bid-ask spread. This paper provides evidence on the effect of accoun ting disclosure on the size of the relative bid-ask spread. This study differs from previous studies in that it examines the effects of disc losure regulation on the market microstructure, not on earnings or ris k predictability. The SEC's 1970 segment disclosure requirement is cho sen because of the added information content due to more finely partit ioned data being presented. Previous research on segment disclosure sh owed improved predictive accuracy of earnings forecasts (Kinney 1971; Barefield and Comiskey 1975; Collins 1976; Baldwin 1984), an increase in price variability surrounding the release of 10-K reports, and a de crease in divergence of beliefs (Swaminathan 1991). A random sample of firms listed on the NYSE as of fiscal year end 1970 is used. The resu lts indicate that the relative bid-ask spread decreased more significa ntly in the period subsequent to the filing of the 1970 10-K reports f or those firms reporting such information for the first time than for either a control group of firms or single-segment firms. For the exper imental group, this downward shift in the relative bid-ask spread is s hown to be a function of the number of segments reported. Overall, the se findings provide limited evidence that the segment disclosure regul ation may have an impact on the market microstructure as represented b y bid-ask spreads.