The Divergent Impact of Financial Ratios on Bid-ask spread: An Empirical Analysis Across Growth Oriented and Capital intensive industries

Abstract

This study investigates the divergent impact of financial ratios on bid-ask spreads, a key proxy for information asymmetry, by comparing the high-growth technology sector with the capital-intensive energy sector. Using high-density fixed effects regression on quarterly data for US-listed firms from 2023–2024, the analysis examines the explanatory power of key financial ratios related to profitability, investment, and firm scale. The results reveal a stark contrast between the industries. For the Growth Oriented Industry, the Technology sector, firm size and, counterintuitively, higher R&D, often a source of uncertainty, was associated with narrower spreads In stark contrast, none of the tested financial ratios had a significant impact on spreads in the energy sector, where only the persistence of the spread itself showed explanatory power. The findings demonstrate that the informational content of financial ratios is not universal but is highly dependent on industry context, challenging a one-size-fits-all approach to financial analysis and highlighting the unique information environments of different sectors.