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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