71st CARF Seminar: Transparency as a Double-Edged Sword: Evidence from Social Score Disclosure in the Agency MBS Market

Monday, December 15th, 2025 10:30 – 12:00（Pre-registration necessary)
※Language: English

Scott Liao
Professor of Accounting
Vice-Dean, Pre-experience and Specialized Programs
Rotman School of Management

Scott Liao is Vice Dean, Pre-experience and Specialized Programs, U of T Distinguished Professor in Financial Analytics and Banking, and Professor of Accounting at Rotman. His research interests include agency problems of debt, banking regulations, and social issues in the mortgage and debt markets. He has published papers in leading journals such as Journal of Accounting and Economics, The Accounting Review, Contemporary Accounting Research and Management Science. His teaching is focused on financial accounting, data analytics and financial fraud. He is an editor at Contemporary Accounting Research.

Classic disclosure theories predict that transparency improves market liquidity by reducing information asymmetry. Yet for assets that trade on fungibility, greater information may instead increase adverse selection and impair market liquidity. We examine this dual role of transparency through the lens of social score disclosure in the agency mortgage-backed securities (MBS) market. This market provides a unique setting because the same MBS can be traded as individual bonds in the specified pool (SP) market or pooled with similar MBS and traded using a standardized contract in the to-be-announced (TBA) market. We first show that social scores are informative about MBS prepayment risk. We then contrast the impact of social score disclosure across the SP and TBA markets. In the SP market, MBS with higher scores (i.e., lower prepayment risk) enjoy a price premium and improved market liquidity after the disclosure. However, since social score disclosure allows sellers to better identify the riskiest eligible MBS to deliver for a given price and higher-quality bonds are more likely to be traded in the SP markets, the TBA market experiences lower prices and liquidity. Our findings provide novel evidence that transparency improves price discovery in the SP market but exacerbates adverse selection in the TBA market, highlighting the detrimental role of transparency in the market depending on fungibility and depth.