Download - Review Report B
Journal of Accounting and Economics
Reviewer’s Report B
Title of Manuscript: Liquidity risk and accounting information
Reference #: Vol. 52 No. 1, March 20
Report Due Date: December 9, 2015
Report Date: December 9, 2015
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Ruoqing Li
Review Report
This paper based on Lang and Maffett’s study and Ng’s study find that the accounting
information impact the liquidity risk. Lang and Maffet find that transparency decrease firm level
liquidity uncertainty. Ng studies that the information quality has a negative relation with liquidity
risk. This study found that the accounting variables can affect firm valuation and cost of capital.
In this study, Dr. Ronnie issues that the accounting information have a significant role in
liquidity happening. I think this paper’s advantage is that Dr. Ronnie collects that prior study
findings. Before early 1980s. liquidity was connected with net profitability. The liquidity helped
to establish the standard asset pricing models. In early 2000s, a lot of studies found that liquidity
not only can significantly affect net profitability, but it can also serve as an investment signal as
it can expect future performance. Recent studies focus on the liquidity risk rather than risk levels.
For example, the liquidity risk is priced in the cross-section of stock return even after controlling
for firm liquidity level (Korajczyk and Sadka 2008). In sum, the previous studies show liquidity
and asset pricing has explained that net profitability of trading stratagem and liquidity level and
liquidity risk. This article examines the Lang and Maffett’s and Ng’s study to find some new
result and evidence. In section 2, the author briefly introduces the liquidity and accounting’s
development. This paper mostly focuses on recent works that the relation between four different
variables: firm return, firm liquidity, market return and market liquidity. The author set up a
covariance matrix to show these recent study’s relations. I think it is a good example for me,
which the author clearly explain what should be discover in future and recent. In the Matrix, the
Acharya and Pedersen study on the Firm level and Market level, the Lang and Maffet focus on
firm level, and the others (include Ng) focus on the Firm return and Market liquidity. In recent
studies, the Lang and Maffet show three significant outcomes. The first result appears that more
transparency due to lower liquidity uncertainty. The second one is that during liquidity crises, the
results own higher index rather than normal period’s. The last one is Finally, measures of
liquidity uncertainty are negatively related to firm valuation as measured by Tobin’s Q. The Ng’s
find shows the Information quality lead to lower liquidity beta which is measured liquidity risk.
In this section, author join other factor to build a new measurement, the author’s result support
prior literatures result. In the final section, base on the author’s analysis, the result of Ronnie
Sadka shows high information quality can help investor to keep away the losses in liquidity
period.
I think this paper own some lack in literature reviews. To compare with Ng’s paper, I found
Ng reference a lot of paper from 2000 to 2009, but this paper has same range which is focus on
2002 to 2005. Ng’s paper wrote earlier than the Ronnie’s, so that the Ng’s data collection is
shorter than Ronnie’s. In my mind, the Ng’s contribution is bigger than Ronnie’s, because Ng
find the higher information quality lower liquidity risk, Ronnie’s main contribution extend to
explain Ng and other’s finding can be supported by recently evidence. In this study, Dr. Ronnie
summary Ng and Lang and Maffet’s paper. This part is very clearly explaining the development
of research accounting information and liquidity. Dr. Ronnie base on the prior studies and build a
new cross-sectional regression that mix previous studies’ factor. This creative support Ng and
Lang’s research, so that further research will have new way to developing the accounting
information research.
To understand this paper, I have to reference Lang and Maffet, Ng, and Pastor and
Stambaugh’s research, because this paper is a comment for these papers. This paper doesn’t
introduce lots of new factor, the author base on prior study factor and compare them in Ng’s
regression analysis. The author finds that prior study was supported by new measurement. The
author first changes the measurement that information quality measure as conditioning variables
for liquidity risk and market risk. The author find that new results are same with Ng’s test, but
new results’ regression coefficient are stable over the prior result. To build perfect effect, the
author use Pastor and Stambaugh (2003) liquidity factor and Sadka (2006). This test find
information quality reduce information asymmetry and then it impacts the information
component of liquidity. Although the author use this approach is not bad, he doesn’t give us
some new ideas. He should consider introduce some new factor that impact information quality.
If I write this paper, I consider some employee or manager salary ratio or ESOP. Because
employee and manager understand some insider information, the insider information disclosure
will impact information quality. While I find Ng and Pastor’s paper own a similar Fig that
explain the market liquidity 1962 to 2008. The stock market crisis happened in 1987. The market
liquidity reduced to the lowest in the world. Almost stock changed to illiquidity. So that it gives
us some evidence for the liquidity risk impact the stock price. The Ng’s research focus on United
States Stock market, Lang and Maffet’s research focus on the global accounting information
data, but we can find some similar result. For example, Loss Freq own similar trend in two test.
As a good writer, he should find this point. Loss for investor is bad news. Although we find the
loss have relationship with liquidity risk, but the author doesn't consider some solution, I think
solution to reduce the liquidity risk is easy such as the company can enhance the operating
information disclosure when the company developing well. The investor like good news rather
than the bad news. Good news will help to solute the liquidity risk.
The second lack is the author explain Ng and Lang research, but he doesn't connect two
paper together. Although two paper focus on different factor, Lang study the firm level, Ng study
the market level. The two level should be connected by firm liquidity risk and market liquidity
risk, as the Fig.1 in this paper. When I see the Fig.1, I have an exception that the author will
show a whole picture on the liquidity, but the discussion doesn't meet the exception. In addition,
prior researches don’t discover liquidity risk in firm level and firm return. I think this part also is
very important in research field. Liquidity risk directly impact the market return. High liquidity
can help investor quickly trading, but the stock return will lower. Some stocks own high returns,
but the stock will be illiquidity. Liquidity risk in firm level hardly measure as an individual
variable. In firm level, the liquidity can be measured by cost of capital. Cost of capital can
impact firm return.
The last lack, the author doesn’t build a new model for this research. Although the author
discusses a model, the model only explain information quality reduce liquidity risk which in turn
reduces the risk premium. I think a good paper that should have good model. It should have
some different measurement in its empirical test.
This research’s contribution also doesn't ignore. This paper’s Fig.1 is good point. It is
clearly explaining the prior literature’s relationship. From this Fig, I understand market return
and market liquidity is future research way. I think market liquidity and market return’s relation
is easy to seem, but we can research detail factors relationship in this system. The paper is some
creativity that it brings some old factor in new model. I look at such a research first time. It is not
only doing literature review but also getting a new result. For example, the table 1 is good. In
Ng’s paper, Ng use information quality as dependent variable, liquidity risk as independent
variable. This paper information quality is independent variable; the author uses the liquidity risk
model as dependent variable. While the research data from prior researches, so that it tests result
is effective by developing of accounting research. When I see the table 3, I feel the author give
us a detail information about information quality and liquidity risk in financial crisis period. The
liquidity ratio in sep-08 is -0.0815 to Feb-09 is -0.2788. Why the liquidity shows this influence?
Because when the beginning of the financial crisis, a lot of people consider the market return
should be go down, the stock in market will sale. But when the financial crisis will finish, the
stockholder will buy stock. So that in Dec-09 the liquidity ratio reduces to -0.1110. The
information quality shows a different trend. When the financial crisis period, the company
disclosure some good news to keep the company stock price. So that information quality will
increase. I think this table is very good for explaining the information quality and liquidity risk
effect in financial crisis period. Although Lang and Maffet do similar explains is their research,
they test too complex to easy get point.
Above all, this paper is lack of creativity, but it builds a good contribution in limitation. The
first it supports information quality can help investor to keep away liquidity risk. This find is
only finding in this paper. Although the finding has limitation in accounting research, it tells
investors should look for market information and firm information in their investment. If the firm
have risk, but it will take some gain in future. As an investor, you don't give up investment for
worry about the liquidity risk or illiquidity risk. If you consider higher information quality, it is
enough to keep away the loss. You don't need to give up investment. In China, the Chinese stock
is experiencing stock problem. In my pinion, if Chinese stock market increase the transparency
and information quality, the stock price should be increased later. I believe this paper is not only
research, but also give some advance in future market management and accounting information.
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