INFORMATION ASYMMETRY AND MARKET FOR EQUITY

Information Asymmetry in brief A firms management generally has better information about the firms value than its shareholder and creditors. This is so because the firms management must refrain from releasing information about the firms strategic plans to either to its shareholders or it s creditors. let this information be leaked to the firms competitors which would cripple the firms ability to compete.

It can cause on firms debt and equity market, ownership structure, capital structure and dividend policy.

Information asymmetry can affect the quality of the market for a firms securities the quality of the market for a stock is closely related to it s information efficiently that is the extent to which a stocks current price incorporates all available information and therefore is an accurate reflection of it s true value. If all information is freely available to all investor, the market for corporate securities should be highly efficient in this regard. However under conditions of information asymmetry obtaining a high level of information efficiency is problematic.

The quality of trading in a equity stock depends on many factors of which information asymmetry is only one. Here we briefly discuss three common measures of quality. a)Float b)Turnover c)Bid- ask spread

Float
A stocks float is the number of shares that are at least potentially actively traded float is generally measured as the number of shares outstanding less the total number of shares held by insiders and other investor who own at least 5% of the outstanding shares a stock float is important because it measure the potential for a typical investor to purchase the firms shares and by extension the potential interest of the investing public in the firms shares.

Turnover A stocks turnover is defined as the ratio of the number of shares traded over a specific period of time to the total number of shares outstanding thus turnover is a measure of the investing publics actual or ex post, trading interest. Based on the discussion above , information asymmetry may dampen trading interest in a firms shares.

Bid Ask spread

we can also gain valuable insight into the quality of the market for a given firms shares by examining it s typical bid-ask spread to explain this measures we must first explain some details of trading in u s equity markets. In each of the u s stock markets dealers continuously provide bid-ask quotes for each of it s listed stocks during trading hours to the bid price is the price at which the dealer is willing to purchase a specified number of the firms shares. while the ask price is the price at which the dealer is willing to sell a specified number of shares the bid-ask spread contains 3 components all of which represent cost that the dealer incurs a)adverse selection cost b)inventory cost c)order processing cost

A dealer always sets his or her price slightly than the bid price. The difference between a dealers ask and bid prices is know as the bid-ask spread. Generally we express the bid-ask spread as a percentage of the stock price. Specifically the percentage spread is the ratio of the difference between the ask and bid prices to the average f the bid and ask prices as shown in equation. ask bid Bid-Ask spread(%)= 100 (ask + bid)2

CONCLUSION the firms management has better information about the value of the firm than its shareholder and creditors. If the information be leaked to the firms competitors which would cripple the ability to compete and its affect on quality of the market for a firms securities.

Thank you

by Kiran Kumar s j Keerthik m n Madesh