The Effect of Reporting Opacity on Trading Opacity: New Evidence from American Depositary Receipt Trades in Dark Pools

• Published in: Contemporary accounting research 2022-10, Vol.39 (4), p.2758-2789
• Main Authors: Boulton, Thomas J., Braga‐Alves, Marcus V., Chakrabarty, Bidisha
• Format: Article
• Language: English
• Subjects: American Depositary Receipts; Dark pool trading; dark pools; disclosure; divulgation; Earnings; earnings announcements; Endogenous; Governance; Indexing; informed trading; Migration; opacité de l'information financière; plateformes de négociation opaques; Portfolios; publication des résultats; reporting opacity; Rotation; Trading; Transactions; transactions d'initiés
• ISSN: 0823-9150; 1911-3846
• DOI: 10.1111/1911-3846.12804

ABSTRACT Trading volume is increasingly shifting to dark venues, and the causes of this move are not well understood. We examine whether a firm's reporting opacity affects its dark pool trading and provide robust evidence that (partly) explains this volume migration. Exploiting the exogenous variation in home‐country reporting opacity in a sample of American Depositary Receipts (ADRs) and using multiple metrics for reporting opacity, we find that greater opacity associates with increased dark pool trading. This relation holds after controlling for firms' information environments, country‐specific governance issues, observable differences between ADRs and other securities that trade in dark pools (matched sample analysis), volume migration to dark pools during earnings announcements, informed trading in lit versus dark venues, ADR levels, IFRS reporting requirements, and the possible endogenous determination of home‐country reporting opacity and dark pool volume. The positive relation is stronger for ADRs held by (quasi‐indexing) institutions with low turnover and diversified holdings and weaker for ADRs favored by (transient) institutions that trade frequently and (dedicated) institutions that hold concentrated portfolios. Bid‐ask spreads are greater for higher opacity ADRs that trade in dark pools, indicating that reporting opacity is associated with the negative effect of dark pool trading on market quality. Our findings help inform the current debate on off‐exchange trading by showing how reporting regimes affect the trading venue choice. RÉSUMÉ Effet de l'opacité de l'information sur l'opacité des transactions : Nouvelles données probantes issues des transactions de certificats américains de dépôt dans les plateformes de négociation opaques Une quantité de plus en plus grande de transactions ont lieu dans les marchés opaques, et les causes de cette migration sont mal connues. Nous vérifions si l'opacité de l'information financière communiquée par une entreprise influence ses transactions dans les plateformes opaques et offre de solides éléments de preuve expliquant (en partie) ce phénomène. En exploitant la variation exogène de l'opacité de l'information financière des pays d'origine dans un échantillon de Certificats Américains de Dépôt (CAD) et en recourant à diverses mesures de l'opacité de l'information, nous établissons qu'une plus grande opacité informationnelle est associée avec une augmentation des transactions dans les plateformes opaques. Ce