The Impact of COVID-19 Disclosures on Information Asymmetry: Evidence from the United Kingdom

Purpose – This study examines the impact of COVID-19 disclosures on information asymmetry. It also explores whether this impact varies for firms with high proprietary costs and a rich information environment.
Design/Methodology/Approach—The authors hypothesise that increased COVID-19 disclosures reduce information asymmetry. To test this hypothesis, they collect data from a sample of UK firms listed on the FTSE All-Share Index for the period 2020-2021. They create a code using Python that parses annual report narratives into sentences and identifies those related to COVID-19. The level of COVID-19 disclosures is measured by calculating the proportion of COVID-related sentences within an annual report.
Findings – The analysis shows that COVID-19 disclosures significantly reduce the bid-ask spread. That is, COVID-19 disclosures in the annual reports of UK firms decrease information asymmetry between managers and investors. This suggests that firms provide informative COVID-19 disclosures that enhance transparency and reduce uncertainty. It also shows that both the tone and readability of COVID-19 disclosures lower information asymmetry. This indicates that investors incorporate both positive and negative COVID-19 disclosures, as well as readable disclosures, into market valuations during periods of uncertainty.
However, the analysis shows that the informativeness of COVID-19 disclosures is diminished in highly concentrated industries where firms provide limited disclosures due to proprietary risks. It also shows no significant association between COVID-19 disclosures and information asymmetry for firms with a rich information environment. This suggests that institutional investors and financial analysts already provide sufficient market information, which reduces the incremental impact of COVID-19 disclosures.
Originality/value – The study contributes to accounting literature by providing new empirical evidence on the impact of COVID-19 disclosures on information asymmetry in the UK, particularly for firms with high proprietary costs during 2020 and 2021. It also provides new evidence on how this impact can be affected by firms with a rich information environment.