Abstract
This paper investigates the effect of internal information asymmetry (hereafter IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company’s stock (DIFRET). Firms with higher DIFRET issue less accurate management forecasts that also exhibit greater pessimistic bias and lower specificity. Management forecasts are also less frequent among firms with higher DIFRET. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET, and weaknesses in internal control systems are particularly detrimental for the quality of both management forecasts and financial statements when DIFRET is higher. Our results are robust to controlling for endogeneity and cannot be attributed to restrictions on top managers’ insider trading.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
