where institutional activity increased significantly had the
biggestincreaseinbid-askspreads.Whilesomeofthiscanbe
attributed to the concurrent increase in volatility in these
stocks, it might also reflectthe perception on the part of
marketmakersthatinstitutionalinvestorstendtobeinformed
investorswithmoreorbetterinformation.Note,though,that
institutional investors also increase liquidity,which should
reducethe orderprocessing cost component ofthebid-ask
spread,andinsomecasestheneteffectcanleadtoalower
spread.
7
Can firms affect the bid-ask spreadsat which their stocks
trade?Thereissomeevidencethattheycanbyimprovingthe
quality of information that they disclose to the financial
markets,thusreducingtheadvantagesthatinformedtraders
mayhaverelativetotherestofthemarket.Heflin,Shaw,and
Wild(2001)lookat 221 firmsandexaminetherelationship
between information disclosure quality—they measure this
using disclosure quality scores assigned by the Corporate
Information Committee of the Financial Analysts
Federation—and the bid-ask spread.
8 They find that bid-ask spreads decrease as information
qualityincreases.Frost,Gordon,andHayes(2002)extendthe
analysistocompareliquidityacrossdifferentequitymarkets
and find that markets with strong disclosure systems also
have the most liquidity.
9
While most of the studies just mentioned have looked at
differences in spreads across stocks, Hasbrouck (1991)
investigated why spreads change for the same stock at
different points in time.