The impact of SEC-required disclosure and insider-trading regulations on the bid/ask spreads in the over-the-counter market

Lev (1988, p. 5) suggests that when accounting regulation reduces asymmetric information, such regulation should reduce the bid/ask spread. His logic is that when security dealers are faced with asymmetric information they will have large bid/ask spreads to protect themselves from losses due to this information. Thus, if accounting regulation reduces asymmetric information, and / or prohibits insider trading, then spread should fall (when these regulations become effective). This paper empirically tests this proposition and finds no support for it.