Working Paper: CEPR ID: DP10665
Authors: Andr Stenzel; Wolf Wagner
Abstract: We present a model that links the opacity of an asset to its liquidity. While low opacity assets are liquid, intermediate levels of opacity provide incentives for investors to acquire private information, causing adverse selection and illiquidity. High opacity, however, benefits liquidity by reducing the value of a unit of private information to investors. The cross-section of bid-ask spreads of U.S. firms is shown to be consistent with this hump-shape relationship between opacity and illiquidity. The analysis suggests that uniform disclosure requirements may not be desirable; optimal information provision can be achieved by subsidizing information. The model also delivers predictions about when it is optimal for asset originators to sell intransparent products or pools composed of correlated assets.
Keywords: asset liquidity; endogenous information acquisition; opacity
JEL Codes: D82; G14; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low opacity (Y20) | high liquidity (E41) |
| intermediate levels of opacity (Y20) | adverse selection (D82) |
| adverse selection (D82) | illiquidity (G33) |
| opacity increases (C69) | incentives for information acquisition increase (D82) |
| beyond a certain threshold of opacity (Y20) | value of private information diminishes (D89) |
| high opacity (Y20) | lower liquidity (G19) |
| high opacity (Y20) | benefit liquidity (G33) |
| uniform disclosure requirements (G38) | not desirable (Y40) |
| optimal information provision (D83) | subsidizing information acquisition (D82) |