The Effect of Algorithmic Trading on Voluntary Disclosure

• In Event: Voluntary Disclosure

Abstract

I investigate how algorithmic trading (AT) affects voluntary disclosure. I find AT prior to an earnings announcement is positively associated with both the likelihood of issuing voluntary guidance and the quantity of guidance issued. I find liquidity-taking AT is more strongly associated with increased guidance than liquidity-making AT. Moreover, AT is associated with decreased information acquisition by analysts and investors. The results suggest active AT is discouraging information acquisition by investors, leading managers to substitute their own disclosures to improve price informativeness. This question is important to academics, regulators, and the investing public due to the current debate over the desirability of algorithmic and high frequency trading in capital markets.

Author

• Andrew Stephan, Northwestern University