How Corporate Diversification Policies Affect the Degree of Information Asymmetry for Financially Troubled Firms

Abstract

This paper examines the effect of financial conditions on information asymmetry. We use a global sample of 2,294 companies to test how the financial condition affects the level of information asymmetry. We find that a higher chance of financial distress is significantly associated with a higher level of information asymmetry. This finding is consistent with the claim that managers in financially distressed firms have stronger incentives to hide or delay poor earnings news and thereby exacerbate the transparency of financial statements.In addition, we also find that diversified firms can deteriorate the adverse effect of financial conditions on asymmetric information. It implies that the characteristics of high flow of information and complex content of information for diversified firms make it easier to hide bad earnings news. In other words, the focused firms can moderate this adverse effect of financial distress on information asymmetry.