Information Acquisition Costs Research Articles

When Machines Read the Web: Market Efficiency and Costly Information Acquisition at the Intraday Level

Nous étudions l’hypothèse d’efficience des marchés au niveau intra-journalier en analysant les réactions du marché aux tweets négatifs et rapports publiés sur Internet par un vendeur à découvert. À l’aide d’études d’événements, nous constatons que les investisseurs peuvent générer un profit anormal, faible mais significatif, en passant des ordres très rapidement suite aux informations publiques publiées sur les réseaux sociaux. La réaction du marché aux tweets est plus forte lorsqu’une entreprise est mentionnée pour la première fois sur Twitter, ce qui montre que les investisseurs sont capables d’identifier les informations pertinentes en temps réel. Nous constatons également que les traders qui parviennent à identifier les informations sur le site Internet du vendeur à découvert avant la diffusion de la même information sur Twitter peuvent générer des rendements anormaux beaucoup plus importants. Comme l’acquisition d’informations sur un site web est plus coûteuse et difficile que l’acquisition de la même information sur Twitter, nos résultats fournissent des preuves empiriques soutenant le paradoxe de Grossman-Stiglitz au niveau intra-journalier. Des anomalies de marché de très courte durée existent sur le marché boursier pour compenser les investisseurs qui ont passé du temps et ont dépensé de l’argent pour mettre en place des robots et des algorithmes afin d’identifier les nouvelles informations avant la foule.

Can New Auditing Standards Improve the Information Environment of the Capital Market? Based on the Accuracy of Analyst Earnings Forecast

Traditional audit reports express audit opinions only by standardized texts, which makes them lack of value. In December 2016, the Ministry of Finance issues 12 new auditing standards, which include Communication of Key Audit Matters in the Independent Audit Reports, aiming to improve the information of audit reports and to reduce the information gap between companies and investors. A+H share listed companies are required to implement the new auditing standards from January 1, 2017. Many scholars study the impact of the new auditing standards on audit report users, such as investors, auditors, etc. (Louis-Philippe, et al., 2014; Christensen, et al., 2014; Wang and Li, 2019). Compared with general report users, analysts as information seekers and interpreters of the capital market (Chen and Liu, 2017), are more professional and sensitive to accounting and auditing information. Due to the high cost of private information acquisition for majority analysts, public information, such as annual reports and audit reports, is the primary source of information. The new auditing standards require auditors to disclose more audit information, especially the disclosure of key audit matters. It improves the information environment of the capital market by increasing the disclosure of the select reason of key audit matters, how to deal with them and the specific audit procedures. Then, can the implementation of the new auditing standards improve the information environment of the capital market by requiring auditors to provide more audit information, which in turn affects the accuracy of analysts’ earnings forecast? Based on the differences in the time and scope of the implementation of the new auditing standards, we use a difference-in-differences model to study the impact of the implementation of the new auditing standards on the accuracy of analysts’ earnings forecast. The study finds that the implementation of the new auditing standards improve the accuracy of analysts’ earnings forecast at the firm level, and the more key audit matters are disclosed in audit reports, the more significant this effect is. Further analysis shows that: (1) The implementation of the new auditing standards mainly reduces analysts’ optimistic bias forecast. (2) The implementation of the new auditing standards improves analysts’ earnings forecast accuracy at the individual level. (3) The implementation effect of the new auditing standards is more significant in companies with low information transparency. The contributions of this paper are as follows: (1) Using the exogenous event of auditing standard reform, this paper confirms that institutional changes can improve the information environment of the capital market, and further improves the accuracy of analysts’ earnings forecast, which enriches the relevant literature on the influencing factors of analysts’ behaviors (Bradshaw, et al., 2010; Wang and Wang, 2012). (2) This paper provides new empirical evidence on the policy effect of the implementation of the new auditing standards (Lu and Zhang, 2018; Wang, et al., 2018; Wang and Li, 2019), and responds to Defond and Zhang (2014) for the awareness of new audit reports and their value. (3) The documents on analysts are lack of study at the individual level, while this paper provides an analysis of heterogeneity at the individual level, which complements the research on individual analysts and their predictive behaviors. (4) This paper gives a positive evaluation of the new auditing standards’ implementation effect, and provides references and suggestions for the follow-up improvement of the auditing standards. This paper verifies the impact of the implementation of the new auditing standards on the information environment of the capital market. It has some implications for policy-makers and analysts. On the one hand, the conclusions of this paper are helpful for policy-makers to evaluate the policy effect of the new auditing standards. On the other hand, there are some implications for analysts. First, improve the ability of analysts themselves, so as to enhance the influence of analysts in the capital market. Second, strengthen the overall construction of the analyst industry, enhance the overall capacity of the industry, and ensure the healthy development of the analyst industry.

But What Does it Mean? Competition between Products Products Carrying Green Labels When Consumers are Active Acquirers of Information

Programs that certify the environmental (or other social) attributes of firms are common. But the proliferation of labeling schemes makes it difficult for consumers to know what each one means – what level of ‘greenness’ does a particular label imply? We provide the first model in which consumers can expend effort to learn what labels mean. The relationship between information acquisition costs, firm pricing decisions, the market shares obtained by alternatively labeled goods and a brown ‘backstop’ good, and total environmental impact prove complex. Consumer informedness can have perverse implications. In plausible cases a reduction in the cost of information damages environmental outcomes. Our results challenge the presumption that provision of environmental information to the public is necessarily good for welfare or the environment.

Transparency and Collateral: The Design of CCPs' Loss Allocation Rules

This paper adopts a mechanism design approach to study optimal clearing arrangements for bilateral financial contracts in which an assessment of counterparty risk is crucial for efficiency. The economy is populated by two types of agents: a borrower and lender. The borrower is subject to limited commitment and holds private information about the severity of such lack of commitment. The lender can acquire information at a cost about the commitment of the borrower, which affects the assessment of counterparty risk. When truthful revelation by the borrower is not incentive compatible, the mechanism designer optimally trades off the value of information about the lack of commitment of the borrower with the cost of incentivizing the lender to acquire such information. Central clearing of these financial contracts through a central counterparty (CCP) allows lenders to mutualize their counterparty risks, but this insurance may weaken incentives to acquire and reveal informatio n about such risks. If information acquisition is incentive compatible, then lenders choose central clearing. If it is not, they may prefer bilateral clearing to prevent strategic default by borrowers and to economize on costly collateral. Central clearing is analyzed under different institutional features observed in financial markets, which place different restrictions on the contract space in the mechanism design problem. The interaction between the costly information acquisition and the limited commitment friction differs significantly in each clearing arrangement and in each set of restrictions. This results in novel lessons about the desirability of central versus bilateral clearing depending on traders' characteristics and the institutional features defining the operation of the CCP.

Costly information acquisition and public disclosure: implications for investor welfare

ABSTRACTWe explore the combined impacts of costly information acquisition and public disclosure for investors. When there are only outsiders in the market, disclosure with low public information precision is beneficial to them because they can obtain more return by thoroughly utilizing the market-making capacity. When insiders and outsiders coexist in the market, the increase of information cost or disclosed-information precision can improve their welfare by reducing adverse selection risk. When all investors are insiders, reducing information acquisition cost is efficient for welfare improvement.

State online voting and registration lookup tools: Participation, confidence, and ballot disposition

ABSTRACTState online voting and registration lookup tools that allow voters to check their voter registration status, confirm their polling location, review a sample ballot, and check the status of an absentee or provisional ballot reduce the cost of information acquisition and service completion while providing voters with the information necessary to participate in the democratic process. The analysis evaluates the relationship between state voting and registration online lookup tools and voter turnout, voter confidence, and the disposition of provisional ballots. Findings suggest that voting and registration lookup tools are related to voter turnout and rejected provisional ballots.

Influencing the Influencers

Social media influencers are category enthusiasts who often post product recommendations. Firms sometimes pay influencers to skew their product reviews in favor of the firm. We ask the following research questions. First, what is the optimal level of affiliation (if any) from the firm's perspective? Affiliation introduces positive bias to the influencer's review but also decreases the persuasiveness of the review. Secondly, since affiliated reviews are often biased in favor of the firm, what is the impact of affiliation on consumer welfare? We find that the affiliation decision depends on the cost of information acquisition, the consumer's prior and awareness, and the disclosure regime. When the consumer's prior belief is low, the firm needs to affiliate less closely or not at all in order to preserve the influencer's persuasiveness, the change in the consumer's belief following the influencer's review. In contrast, when the consumer's prior belief is high, the firm fully affiliates with the influencer to both maximize awareness and prevent a negative review. We also show that the firm's involvement can be Pareto-improving if the information acquisition cost is relatively high, and a partial disclosure rule may increase consumer welfare.

Big Data as a Governance Mechanism

This study empirically investigates two effects of alternative data availability: stock price informativeness and its disciplining effect on managers’ actions. Recent computing advancements have enabled technology companies to collect real-time, granular indicators of fundamentals to sell to investment professionals. These data include consumer transactions and satellite images. The introduction of these data increases price informativeness through decreased information acquisition costs, particularly in firms in which sophisticated investors have higher incentives to uncover information. I document two effects on managers. First, managers reduce their opportunistic trading. Second, investment efficiency increases, consistent with price informativeness improving managers’ incentives to invest and divest efficiently.Received June 1, 2017; editorial decision June 1, 2018 by Editor Wei Jiang. The Author has furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Costly Private Learning and Informed Trading: Evidence from Mutual Funds in China

Despite a vast theoretical literature that builds on costly information acquisition, there is no direct evidence on the importance of information costs in investors’ private information choices. Using a large sample of Chinese mutual fund managers’ visits to firm headquarters and exploiting the introduction of high-speed railway as a quasi-natural experiment, I find substantial and quick responses to exogenous cost shocks: A one-standard-deviation travel time reduction increases site visits by 28% of the average frequency and semiannual stock trading profits by CNY 1.4 million at the fund family—firm pair level. These findings demonstrate investors’ elasticity to information costs.

COME ON IN, THE WATER'S FINE! AN EXPERIMENTAL EXAMINATION OF HYBRID IPO AUCTIONS WITH A PUBLIC POOL

AbstractWe offer experimental and theoretical evidence that auction methods for initial public offerings (IPOs) in the United States may be improved through hybrids that include a separate retail tranche or “public pool.” The multi‐unit uniform price auctions in our laboratory experiments incorporate key IPO features including endogenous entry, costly information acquisition, and differing capacity constraints. As predicted, hybrids increase proceeds and reduce price volatility, price error, and the incentive for small bidders to free ride. Underpricing occurs in both treatments but is attenuated with the public pool. Our results imply that both IPO auctions and equity crowdfunding/crowdinvesting should include separate, non‐price‐setting tranches for the general public.

The Social Value of Asymmetric Information Revisited

We consider probabilistic information acquisition in the canonical Grossman-Stiglitz pure-exchange economy. In contrast to the previous literature, we show that costly information acquisition in financial markets can be welfare-improving. In particular, when risk-sharing incentives are weak and information quality is moderate, the welfare benefit can be very significant for speculators who provide liquidity. We show that marginal welfare can be decomposed into a positive probability-choice effect and a negative informed-trading effect. When the latter effect dominates, which occurs when risk-sharing incentives are strong, only the no-information equilibrium is Pareto-optimal. Otherwise, heterogenous endowment shocks and the Hirshleifer effect allow for a continuum of Pareto optimal equilibria. This suggests that regulatory efforts to alter the amount of informed trading may be unnecessary.

Adverse Selection, Search Frictions and Endogenous Market Structure

A large number of financial assets are traded in both exchanges and over-the-counter markets (i.e., centralized and decentralized markets, CM and DM hereafter, respectively). Moreover, the last century has witnessed the secular migration of asset trading from CM to DM. To this end, this paper develops a tractable model on strategic selection of venue trading to study the causes and consequences of endogenous coexistence of CM and DM. We show that as matching efficiency in DM increases and the information cost decreases, more trade migrates from CM with adverse selection to DM with search frictions. This finding reveals that investigating implications of adverse selection requires considering the endogenous market structure. Moreover, we find that reducing informational asymmetry with costly information acquisition may be detrimental to welfare. We then apply the model to evaluate the heterogeneous treatment effect of the government asset purchase program initiated after the global financial crisis.

Has education led to secularization? Based on the study of compulsory education law in China

Has education led to secularization? Using microdata from the Chinese General Social Survey (CGSS), we take the implementation of the Compulsory Education Law (CEL) in 1986 in China as the instrumental variables (IV) for personal educational attainment. We study the causal effect of education on personal religious beliefs and explore the potential mechanisms. The empirical results show that education can lead to secularization. More precisely, individual religious belief decreases by 1.5% with one additional year of personal education. In addition, the increase in regional urbanization significantly affects religious beliefs by replacing the insurance function of religion and reducing information acquisition costs. Moreover, there is an alternative relationship between religious activities and social activities, and women affected by the CEL experience a higher negative impact on religious beliefs than men.

The Effect of Voluntary Disclosure on Investment Inefficiency

Firms' ability to voluntarily disclose or conceal information may affect their investment decisions. In particular, voluntary disclosure in the presence of uncertainty about information endowment (a la Dye 1985) induces firms to choose the riskier among projects with equal expected returns (Ben-Porath et al. 2017). We study multi-stage investment decisions in which the firm's manager first chooses between projects with different riskiness and later may privately learn additional information about the technology of the chosen project. If informed, the firm can voluntarily disclose the new information to the market. Finally, based on the available information the manager determines the scale of the investment. If uninformed, the manager cannot tailor the investment scale to the realized technology. The resulting decrease in expected cash flow is higher for a riskier project. We study how a manager, who cares about both the firm's stock price (myopic incentive) and the long-term cash flow, optimally chooses the project and the voluntary disclosure decision, and how the investment efficiency varies with managerial myopia and information environment. As expected, managerial myopia always (weakly) decreases overall investment efficiency. However, information environment (the probability of obtaining information) may have a non-monotonic effect on overall investment efficiency. We extend the base model to allow for costly information acquisition and show that main results still hold.

Information, Participation, and Passive Investing

I investigate the impact of fundamental information acquisition costs on price informativeness and passive investing. Within a REE model of multiple risky assets and a redundant market index, I define passive investing as the optimal decision to: 1) free-ride on the information acquisition efforts of active traders in the index asset, and 2) forgo all stock picking strategies. Falling information costs have the dual effect of lowering the cost of market timing, decreasing passive share, and lowering the cost of stock picking, increasing passive share. If the stock picking effect dominates the market timing effect, passive share increases in tandem with greater price informativeness. I exploit SEC's eXtensible Business Reporting Language mandate as a negative shock to information costs to provide suggestive evidence that falling information costs may be contributing to the rise in passive investing.

Why Do Individual Investors Disregard Accounting Information? The Roles of Information Awareness and Acquisition Costs

ABSTRACTWe investigate the frictions that impede individual investors’ use of accounting information and, in particular, their costs of monitoring and acquiring accounting disclosures. We do so using an archival setting in which individuals are presented with automated media articles that report both current earnings news and past stock returns. Although these investors have earnings information readily available, we find no evidence that their trades incorporate it. Instead we find that their trading responds to the trailing stock returns presented in the articles. Our study raises questions about the efficacy of regulations that aim to aid less sophisticated investors by increasing their awareness of and access to accounting information.

Personal research, second opinions, and the diagnostic effort of experts

We investigate the effect of increasing the information endowment of customers in markets where experts provide both a diagnosis and the service under two alternative institutions: customers may either directly acquire information through personal research (PR) before consulting the expert or obtain a second opinion (SO) after diagnosis. We compute the equilibrium for these institutions and study their effects empirically in a series of experiments. We find that PR dominates the baseline (of no access to information for customers) and SO with respect to market efficiency, and extracts greater effort from experts. Our results also indicate that decisions are optimal conditional on investment in information acquisition, and customers exhibit a preference for PR over SO. Finally, we find that lower information acquisition costs for customers in PR have positive effects on market efficiency.

Product Market Competition, Management Disclosure, and Analyst Coverage: Evidence From the XBRL Adoption

This paper provides a new set of tests on the relationship between product market competition, information processing cost, and production of information by managers. The recent regulation regarding the mandatory adoption of XBRL (eXtensible Business Reporting Language) is a natural experiment that allows us to investigate a number of interesting questions on management disclosure and product market competition. Using the adoption of XBRL as an exogenous shock to information acquisition and processing costs, in a difference-in-differences framework, we find that the accuracy of management’s disclosure is higher in a less competitive industry due to the relatively small disclosure-related costs. We also find that stock returns of the firms in a less competitive industry contain more firm-specific information. Overall, our results suggest that a less competitive industry leads to more disclosure and thus a better information environment. These results may help to reconcile conflicting views of previous theoretical and empirical research.

Financial Statement Comparability and Idiosyncratic Return Volatility

AbstractThis study examines the association between financial statement comparability and idiosyncratic return volatility (IRV). A greater degree of comparability lowers information acquisition costs, reduces the uncertainties associated with performance evaluation, and increases the overall quantity and quality of information available to corporate outsiders, which, in turn, helps investors to understand and evaluate the cash flow and performance of firms more accurately. Therefore, we hypothesize a negative association between financial statement comparability and IRV. Using a large US sample from 1981 to 2013, we show that financial statement comparability is associated with lower level of IRV significantly. We also find this association to be more pronounced in a poor information environment. This study contributes to the emerging research that stresses the benefits of financial statement comparability.

Experience of the signaller explains the use of social versus personal information in the context of sentinel behaviour in meerkats

To maximise foraging opportunities while simultaneously avoiding predation, group-living animals can obtain personal information on food availability and predation risk and/or rely on social information provided by group members. Although mainly associated with low costs of information acquisition, social information has the potential to be irrelevant or inaccurate. In this study we use playbacks of individually distinct sentinel calming calls produced during sentinel behaviour, a form of coordinated vigilance behaviour, to show that meerkats (Suricata suricatta) discriminate between social information provided by different sentinels and adjust their personal vigilance behaviour according to the individual that is played back. We found that foraging group members acquired the lowest amounts of personal information when hearing social information provided by experienced individuals that act as sentinels most often in their group and littermates. Our study shows that social information can be flexibly used in the context of sentinel behaviour in order to optimize the trade-off between foraging and vigilance behaviours dependent on discrimination among signallers. We also provide novel evidence that the experience of sentinels rather than their age or dominance status is the main factor affecting the extent to which individuals use social information.