Information distance: Conceptual development and empirical tests of a novel measure of cross-national distance

Abstract

Socio-political risks (SPRs) are important drivers of firm-level risk. Beyond unexpected variation in socio-political environments over time, the difference between home and host country socio-political contexts induces risk as it increases the difficulty to understand a foreign environment. This risk is specifically important for internationally active firms, as they need to gather and interpret information stemming from different socio-political environments to manage their international operations. However, existing literature lacks both concept and measure to capture such information asymmetry. In this paper, we explain how cross-national distance is related to SPRs through information asymmetry, and develop a reflective measure of cross-national distance based on information theory, signal analysis, and financial market information. Conceptual and empirical evaluations and applications of the concept and measure proposed provide support for our approach.