Changes In Information Asymmetry Research Articles

Financial innovation in the uranium mining sector: analysis of an exchange-traded fund and its impact on trading characteristics of uranium stocks

PurposeThe purpose of this study is to examine the impact of a recent innovation in the uranium market, the Global X Uranium Exchange-Traded Fund (URA), on the trading characteristics of constituent and non-constituent stocks.Design/methodology/approachThe authors analyse bid-ask spread measures, relative effective spreads and adverse selection costs to assess changes in information asymmetry among uranium stocks. The authors also study abnormal returns to assess the impact of URA on the market.FindingsOver a three-month period, following the introduction of URA, the authors find uranium stocks display decreased bid-ask spread measures, driven by reductions in information asymmetry. Relative effective spreads decrease by 36% after the introduction of URA, and adverse selection costs decline by 24% over the same period. Uranium stocks experience a significant positive abnormal return of 5.0% the day after the introduction of URA with subsequent price reversals. These suggest that the introduction of URA prompted uninformed traders to rebalance portfolios and migrate to the less information-sensitive Exchange-Traded Fund (ETF), causing temporary deviations in trading characteristics.Originality/valueThe authors demonstrate that the introduction of new financial securities to the market can have a significant impact on the trading characteristics of related equities. As URA is the only ETF in the uranium sector, the authors thereby avoid the influence of multiple ETFs that may have impacted previous studies.

Do mergers and acquisitions affect information asymmetry in the banking sector?

PurposeThis paper aims to investigate the consequences of mergers and acquisitions (M&As) on information asymmetry in the banking sector. Specifically, the authors look at whether specific firm or deal characteristic influence information asymmetry levels between insiders and investors, as well as the impact of recent regulation such as the Dodd–Frank Act.Design/methodology/approachThe authors decompose the M&A process into three periods (pre-announcement, negotiation and post-completion period) and document changes in the information asymmetry levels between insiders and investors through the M&A process. The authors capture changes in information asymmetry using six different spread-based information asymmetry measures.FindingsThe authors find evidence that information asymmetry increases following M&A announcement and decreases following deal completion. These findings are more pronounced for acquisitions involving a private target, all-cash deals and for mergers, as opposed to acquisition of assets. We find that overall, successful mergers improve the quality of the information environment, while failed deals degrade it. Additionally, the enactment of Dodd–Frank reduced the magnitude of the changes in information asymmetry during the M&A process. The results are important to regulators, policy makers and investors.Originality/valueTo authors’ knowledge, this is the first study that looks at the effect of bank M&As on information asymmetry as well as the effect of regulations on information asymmetry.

Capitalization of In‐Process Research and Development under SFAS 141R and Information Asymmetry

ABSTRACTThis study examines the effect of capitalizing acquired in‐process research and development (IPR&D) on information asymmetry under Statement of Financial Accounting Standards No. 141 (R) (SFAS 141R). SFAS 141R requires acquirers to fully recognize IPR&D at fair value as an indefinite‐lived intangible asset until completion or discontinuation of the project. Prior research suggests IPR&D capitalization will result in an improvement in the information environment. In contrast, we find no evidence that capitalizing IPR&D improved the information environment for IPR&D acquirers. Instead, most of our results suggest no significant change in information asymmetry for IPR&D acquirers during the post‐SFAS 141R period, relative to the concurrent changes for non‐IPR&D acquirers. In cases in which the results suggest a statistically significant increase, the economic magnitudes are relatively small. In addition, we find no evidence that IPR&D acquirers engaged in increased classification shifting between IPR&D and goodwill during the post‐SFAS 141R period, as critics of capitalization had feared.

Group-Affiliated Analysts’ Strategic Forecasts During a Year: Evidence from Korea

ABSTRACTIn examining the family-controlled business groups in Korea, prior literature shows that group-affiliated analysts’ forecasts are optimistically biased. This article investigates whether the group-affiliated analysts strategically time the level of accuracy and bias in their forecasts for the same group-affiliated firms due to the change in information asymmetry in the market. The results show that the group-affiliated analysts issue more accurate and less optimistic earnings forecasts for the affiliated firms when the level of information asymmetry is low; particularly, in April, which is right after annual earnings announcements.

Disclosure “Scriptability”

ABSTRACTIn response to the increasing use of computer programs to process firm disclosures, this registered report develops a new measure of “scriptability” that reflects computerized, rather than human, information processing costs. We validate our measure using SEC filing‐derived data from prior research and identify firm and disclosure characteristics related to it. In our planned hypothesis tests, we find some evidence that the speed of the market response to filings increases with scriptability, but find little evidence that scriptability affects the incidence and speed of news dissemination by Dow Jones. In additional analyses, we find that scriptability exhibits both positive and negative associations with changes in information asymmetry between market participants, depending on the filing, trading window, and measure examined. We also find little evidence that XBRL interacts with scriptability in a meaningful way. Overall, our study broadens our understanding of information processing costs and provides opportunities for new avenues of research.

Information Asymmetry and the Bond Coupon Choice

ABSTRACTWe examine the role of the coupon choice in bond contracts as a signaling mechanism in the presence of information asymmetry between borrowers and lenders about the credit quality of the borrower. Prior literature focuses on the use of maturity as a signaling mechanism. We conjecture that the coupon is a more effective signaling mechanism. We exploit the enactment of Regulation Fair Disclosure (RegFD) as an exogenous shock to the level of information asymmetry, and employ both bond- and equity market-based variables of information asymmetry to test our conjecture. We find that following the enactment of RegFD, the coupon rates of bonds issued by unrated firms increase relatively more than those of rated firms, consistent with the coupon choice addressing information asymmetry. We fail to find similar increases in maturity. Our inferences remain the same when using the probability of informed trade to measure relative changes in information asymmetry around the enactment of RegFD. We also draw similar conclusions utilizing exogenous drops in analyst coverage that result from brokerage house closures as an alternative quasi-natural experiment. Finally, we provide evidence that the coupon is used more extensively when issuance costs are higher, precisely when maturity is predicted to be a less efficient contract term with which to address information asymmetry.JEL Classifications: G10; G23; M21; M41.

Information Asymmetry and the Bond Coupon Choice

We examine the role of the coupon choice in bond contracts as a signaling mechanism in the presence of information asymmetry between borrowers and lenders about the credit quality of the borrower. Prior literature focuses on the use of maturity as a signaling mechanism. We conjecture that the coupon is a more effective signaling mechanism. We exploit the enactment of Regulation Fair Disclosure (RegFD) as an exogenous shock to the level of information asymmetry of unrated firms relative to rated firms. We find that following the enactment of RegFD, the coupon rates of bonds issued by unrated firms increase relatively more than those of rated firms, consistent with the coupon choice addressing information asymmetry. We fail to find similar increases in maturity. Our inferences are the same when using alternative research designs to measure changes in information asymmetry around the enactment of RegFD. We also draw similar conclusions utilizing exogenous drops in analyst coverage that result from brokerage house closures as an alternative quasi-natural experiment. Finally, we provide evidence that the coupon is used more extensively when issuance costs are higher, precisely when maturity is predicted to be a less efficient contract term with which to address information asymmetry.

Information content of analyst recommendations in the banking industry

We investigate whether analyst recommendations about banks become more valuable in periods when the information environment for banks is more uncertain. The degree of uncertainty in the information environment for banks is time-varying because of time-varying changes in information asymmetry for banks and in bank regulations. Based on a sample of 23,632 analyst recommendations of 1106 banks, we find that analyst recommendations are more informative for banks that are riskier and subject to a higher degree of information asymmetry. Furthermore, regulations that reduce the information asymmetry (Sarbanes-Oxley Act) or the risk (Dodd-Frank Act) of the banking industry also reduce the information content of analyst recommendations, while regulations that increase the risk of the banking industry (Gramm-Leach-Bliley Act) increase the information content of analyst recommendations. Our results suggest the role of an analyst is more valuable when the information environment is more uncertain.

How interactive marketing is changing in financial services

Purpose This paper aims to explore the impact of the internet and related information and communications technology developments on how financial services (FS) are distributed and how customers are managed, in particular, not only how companies can differentiate between “good” and “bad” customers and manage them appropriately but also how customers can be “bad” and escape the consequences. It also explores how changes in information asymmetry between suppliers and customers affects who gains or loses from the relationship between them. Design/methodology/approach The data for the article are from the authors’ consulting and conference chairing experience. The article is in the form of a reflection on this, rather than a hypothesis-based research article. Findings One of its findings is that those responsible for controlling damage done to companies by fraudulent or negative value customers (typically those managing underwriting or risk) and those responsible for recruiting, retaining and developing customers (typically marketing, sales and customer service) do not work closely enough together, and this can lead to not only damage to shareholder value but also damage to the customer experience. Research limitations/implications The paper identifies the need for more research covering the processes, data, analysis, systems and strategies required to manage both good and bad customers and the practical problems of implementation. Practical implications The main practical implication is that in designing products and the customer service experience, FS marketers need to take into account much more systematically the “dark side” of customer activity. Originality/value This paper is one of the first to explore its issues in detail.

The Impact of Cross‐Listing on the Home Market's Information Environment and Stock Price Efficiency

AbstractWe empirically examine changes in information asymmetry and informational efficiency of cross‐listed stocks in their home market around a cross‐listing in the United States. We estimate intraday market microstructure measures of information asymmetry and price efficiency, and find that a U.S. cross‐listing significantly improves the quality of a firm's information environment and stock price efficiency in the home market. This improvement is stronger for cross‐listings that take place after the adoption of Sarbanes‐Oxley Act. Our results demonstrate that stricter disclosure from a U.S. cross‐listing is beneficial, in line with the legal and reputational bonding hypotheses.

What is the value of sell-side analysts? Evidence from coverage initiations and terminations

We investigate three potential channels of analyst value creation: improving fundamental performance through monitoring, reducing information asymmetry, and increasing investor recognition. We show that changes in investor recognition have consistent explanatory power for the market reaction to coverage initiations and terminations but find mixed evidence for changes in information asymmetry and no evidence for changes in fundamental performance as determinants of the market reaction. These results suggest that analysts create value for firms under their coverage by improving their investor recognition and not by monitoring or reducing information asymmetry.

What Is the Value of Sell-Side Analysts? Evidence from Coverage Changes

We investigate three potential channels of analyst value creation: improving fundamental performance through monitoring, reducing information asymmetry, and increasing investor recognition. We show that changes in investor recognition have consistent explanatory power for the market reaction to coverage initiations and terminations but find mixed evidence for changes in information asymmetry and no evidence for changes in fundamental performance as determinants of the market reaction. These results suggest that analysts create value for firms under their coverage by improving their investor recognition and not by monitoring or reducing information asymmetry.

News announcement effects of compliance with section 404 of SOX: Evidence from non-accelerated filers

This study examines the effects of Section 404 of the Sarbanes–Oxley Act of 2002 (SOX) news announcements on a non-accelerated filer's levels of information asymmetry proxied by bid–ask spread. We find that, on average, the information asymmetry decreases (increases) after the announcements of compliance (deferral of compliance) with Section 404 of SOX. While a deferral announcement delays incurring the cost of compliance with Section 404, it signals lack of disclosure of relevant price sensitive information about the effectiveness of internal control systems, leading to higher levels of information asymmetry. Consistently, we find that, on average, prices increase (decrease) in response to the announcements signaling compliance (deferral of compliance) with Section 404 of SOX. Additionally, the results from cross-sectional analyses of abnormal returns indicate that changes in information asymmetry are priced by investors, whereas firm-specific estimates of cost of compliance with Section 404 do not appear to play a significant role in securities.

The Impact of Cross-Listing on the Home Market's Information Environment and Stock Price Efficiency

We empirically examine changes in information asymmetry and informational efficiency of cross‐listed stocks in their home market around a cross‐listing in the United States. We estimate intraday market microstructure measures of information asymmetry and price efficiency, and find that a U.S. cross‐listing significantly improves the quality of a firm's information environment and stock price efficiency in the home market. This improvement is stronger for cross‐listings that take place after the adoption of Sarbanes‐Oxley Act. Our results demonstrate that stricter disclosure from a U.S. cross‐listing is beneficial, in line with the legal and reputational bonding hypotheses.

The Effect of Demand–Supply Mismatches on Firm Risk

A supply chain management (SCM) system comprises many subsystems, including forecasting, order management, supplier management, procurement, production planning and control, warehousing and distribution, and product development. Demand–supply mismatches (DSMs) could indicate that some or all of these subsystems are not working as expected, creating uncertainties about the overall capabilities and effectiveness of the SCM system, which can increase firm risk. This article documents the effect of DSMs on firm risk as measured by equity volatility. Our sample consists of three different types of DSMs announced by publicly traded firms: production disruptions, excess inventory, and product introduction delays. We find that all three types of DSMs result in equity volatility increases. Over a 2‐year period around the announcement date, we observe mean abnormal equity volatility increases of 5.62% for production disruptions, 11.19% for excess inventory, and 6.28% for product introduction delays. Volatility increases associated with excess inventory are significantly higher than the increases associated with production disruptions and product introduction delays. Across all three types of DSMs, volatility changes are positively correlated with changes in information asymmetry. The results provide some support that volatility changes are also correlated with changes in financial and operating leverage.

S&P 500 Index reconstitutions and information asymmetry

We examine the changes in information asymmetry around Standard and Poors (S&P) 500 Index additions and deletions as a possible explanation for the stock price reaction to index revision events. Using an array of information asymmetry measures to represent the complex information environment of corporations, we find a significant decrease in information asymmetry following index inclusions but show that the drop provides limited explanatory power for the announcement return. On the other hand, we find strong support for an increase in information asymmetry after deletion events, and firms with a higher level of information asymmetry prior to deletion accrue larger losses upon deletion announcements. Finally, relative to the behaviour of other firms in the S&P 500 Index, forecast error declines but forecast optimism remains consistent following index inclusions for newly added firms. This study adds to the ongoing debate over demand curves for S&P 500 Index stocks and shows that changes in information asym...

Home-Bias Investment Measure: Evidence from a Repeated Experiment in Taiwan

This study uses repeated experiment to explore the possible reasons of home-bias investment. The results indicated that the reasons for home-bias investment are information asymmetry or familiarity, resulting in over-investment in Taiwanese investment vehicles. The level of home-bias investment changed with the level of information asymmetry changes. A significant difference in home-bias investment was observed for different levels of education, investment experience, age, annual income and annual investment. Moreover, the difference in investment ratio did not change based on different levels of information asymmetry.

Business Relationship and Information Effects of Share Repurchases on Stockholders' Wealth

Using U.S. data from 2003 to 2008, this study explores the information effects of the changes in information asymmetry of repurchasing firms and their business counterparties due to share repurchases on repurchasing firms’ stockholders’ wealth. We find that the information asymmetry of repurchasing firms decreases after repurchase announcements, which enhances their stockholders’ wealth (information premium effect). However, the information premium effect is offset by the relative information advantages gained by repurchasing firms’ business counterparties (relative information advantage effect), especially by their suppliers.

Market Micrsotructure Changes around Accelerated Share Repurchase Announcements

We investigate the impact on trading characteristics of firms when they announce share repurchases using a relatively new buyback method - Accelerated Share Repurchases (ASRs). We find that trading costs decrease and market quality improves following an ASR announcement. The improvement in liquidity is not accompanied by significant changes in information asymmetry or price volatility. Multivariate tests show that the change in volatility and the presence of price constraints in the ASR agreement are significant in explaining the changes in spreads, but the reasons given by firms for conducting the ASRs are not. Thus, in the case of ASRs, the announced involvement of an investment bank buying shares on behalf of the firm improves liquidity without significantly affect the level of information asymmetry.

MARKET MICRSOTRUCTURE CHANGES AROUND ACCELERATED SHARE REPURCHASE ANNOUNCEMENTS

AbstractI investigate the impact on trading characteristics of firms announcing share repurchases using a relatively new buyback method—accelerated share repurchases (ASRs). I find that trading costs decrease and market quality improves following an ASR announcement. The improvement in liquidity is not accompanied by significant changes in information asymmetry or price volatility. Multivariate tests show that the change in volatility and the presence of price constraints in the ASR agreement are significant in explaining the changes in spreads, but the reasons given by firms for conducting the ASRs are not. Thus, in the case of ASRs, the announced involvement of an investment bank buying shares on behalf of the firm improves liquidity without significantly affecting the level of information asymmetry.