Information Externalities Among Listed Firms

We establish the presence of sizeable information externalities across firms listed on U.S. stock exchanges. To identify externalities, we use staggered non-marginal increases in disclosure at peer firms that are unaccompanied by changes in mandatory disclosure at focal firms. We find that a peer firm's mandatory disclosure improves the focal firm's trading liquidity directly by reducing information asymmetry and indirectly by crowding in both voluntary disclosure and analyst information production at the focal firm. Positive information externalities, and the complementarities they operate through, support regulators’ use of mandatory disclosure to improve the market-wide information environment.