Information Acquisition Costs Research Articles

Is Transparency Good in a Supply Chain? The Downside of Information Acquisition Transparency

ABSTRACTIn the supply chain, retailers usually have inherent advantages over manufacturers in obtaining demand information because they are closer to the final market and can directly interact with consumers. However, manufacturers cannot make sure whether their retailers have obtained extra demand information. The retailer's information acquisition state is also an important aspect of information asymmetry among supply chain participants, besides the demand information itself. We examine two modes observed in practice regarding the transparency of the retailer's information acquisition state: non‐transparency and full transparency. By incorporating a manufacturer's information belief adjustment strategy, our study thus addresses a retailer's acquisition and ex‐post sharing of information (i.e., the decision on how to share acquired information) under the two transparency modes. The main findings show that under the non‐transparency mode, the retailer shares low‐demand information but hides high‐demand information. With respect to the interim profit (i.e., after the acquisition cost is realized), the preferences of the manufacturer, retailer, and supply chain on the two modes depend on the information acquisition cost. With respect to the ex‐ante profit (i.e., before acquisition cost is realized), surprisingly, the manufacturer and supply chain always prefer the non‐transparency mode, whereas the retailer's preference for the two modes still depends on the acquisition cost. In addition, our equilibrium outcome reveals that the retailer and the manufacturer will never sign an internal information sharing agreement (i.e., never achieve the full transparency mode), whether before or after the realization of information acquisition cost. We also find that the expected consumer surplus under the non‐transparency mode is always higher than that under the full transparency mode, which is also a counterintuitive outcome. Finally, our main findings in the core model are relatively robust when considering acquisition cost sharing, general demand distribution, general acquisition cost distribution, ex‐ante informed retailer, and imperfect information acquisition.

A Literature Review on the Theory of Asymmetric Information

Asymmetric information refers to a situation in which one of the parties involved in a market transaction has more information than the other, which reduces efficiency in resource allocation. The basic reasons are the high cost of information acquisition, blocked information transmission channels, and lack of enough information disclosure. Problems such as adverse selection and moral hazard created by asymmetric information damage the efficiency of the market. Asymmetric information has played a very important role in lending, hotel, and catering. As for the industry of lending, the existence of asymmetric information between borrowers and lenders would make it easy for high-risk borrowers to obtain loans and, further, increase the risk of default. Asymmetric information within the hotel industry makes it hard for consumers to judge the hotels service quality and price rationality. Asymmetric information affects investment decisions and enterprise efficiency in the catering industry, distorting valuation and causing investment loss. Addressing asymmetric information in various industries is crucial for fostering market transparency and efficiency. To achieve this, researchers must employ both signaling and screening models to mitigate the adverse effects of information asymmetry. This paper examines historical literature on asymmetric information across diverse industries and delineates strategies to enhance information transparency and promote more informed decision-making.

Amplifying angels: Evidence from the INVEST program

This paper shows that angel investor grants encourage new investors to enter the risk finance market, where they syndicate investments with other investors. We argue that this results from the high cost of information acquisition for new investors. New investors bring additional capital into the market but provide little managerial support. However, as these investors join syndicates, ventures can raise larger financing amounts without compromising managerial support. Taken together, these factors positively affect the performance of entrepreneurial ventures. To test our hypotheses, we consider the case of Germany, where the federal government has introduced an investment grant for angel investors. Combining applicant data from the subsidy program with company and ownership information on the quasi-universe of German companies and a large-scale company-level panel survey covering over 900 angel-financed ventures to empirically assess our hypotheses provides strong support for our predictions.

Information Acquisition Costs and Analysts’ Cash Flow Forecasts: The Role of Management Cash Flow Forecasts

We examine whether the provision of managerial cash flow forecasts is a significant predictor of analysts’ decision to cover a firm with cash flow forecasts. Unlike managerial earnings forecasts, which are often issued to walk down analyst earnings estimates, managers issue cash flow forecasts to counter bad earnings news and lessen the cost of investor and analyst information acquisition (Wasley & Wu, 2006). Motivated by the increasing popularity of managerial cash flow forecasts and prior empirical evidence that analysts are less likely to follow a firm for which the costs of acquiring financial information are prohibitive (e.g., Liu, 2011), we predict and find that the provision of managerial cash flow forecasts is a significant determinant of the likelihood of analyst cash flow coverage. We also find that analysts are less likely to issue cash flow forecasts when the effort necessary to follow a firm is high. Together, the evidence suggests that the existence of management cash flow forecasts is an important determinant of analysts’ cash flow coverage.

Second-price auctions with information acquisition costs

Second-price auctions with information acquisition costs

The multilevel determinants of overlapping membership on board committees: Evidence from Chinese banks

This study manually collects data on 4090 board committee members from 36 listed banks in 11 regions of China from 2007 to 2020, uses a hierarchical linear model, and integrates institutional and resource dependence theories to examine the multilevel determinants of overlapping membership on board committees. The results show that low legalization and the absence of chief risk officers promote overlapping membership on board committees. Directors who have financial expertise, are shorter-tenured, and do not have social relationships with senior leaders sit on more board committees. Further analysis shows that information and resource needs are more likely to drive overlapping membership on board monitoring committees, and independent directors with lower information acquisition costs sit on more board committees. The moderating analysis between multilevel factors shows that legalization and the presence of chief risk officers substitute for, while religion and board interlocks complement director-level information and resource needs.

Information acquisition and tax avoidance: Evidence from a natural experiment

AbstractAnalyzing the launch of high‐speed rail (HSR) services in China as a natural experiment, we identify a positive externality stemming from lower information acquisition costs: the reduction in firms’ overinvestment in tax avoidance. Specifically, we find that outsiders undertake more corporate site visits and firms engage in less tax avoidance after the opening of HSR lines in the cities where these firms are located, leading to enhanced firm value. In another result consistent with expectations, we document that the impact of the introduction of HSR lines on tax avoidance is concentrated in firms in which insiders exhibit a high propensity to extract rents through aggressive tax strategies. Our results imply that more efficient transportation facilitates site visits and the acquisition of firm‐specific information, particularly soft information. This improvement strengthens external monitoring, thereby limiting the ability of insiders to accumulate private benefits under the guise of tax avoidance that benefits all shareholders as the residual claimants.

Digital infrastructure investment and corporate debt concentration: Evidence from a quasi-natural experiment

This study examines the relationship between digital infrastructure investment and corporate debt concentration. Investing in digital infrastructure facilitates communication and reduces creditors' information acquisition costs, which enhances their monitoring capabilities and improves the information environment. Utilizing the phased introduction of the “Broadband China” strategy in demonstration cities as a quasi-natural experiment, our staggered difference-in-differences analysis reveals that this policy intervention reduces debt concentration in demonstration cities. This suggests that enhanced digital infrastructure and subsequent improvements in the information environment enable a more diversified corporate debt structure. Our findings remain robust when subjected to various sensitivity analyses, including alternative samples, estimation methods, variable measurements, dynamic analysis, placebo tests, and propensity score matching. Furthermore, the cross-sectional analysis reveals that the impact of digital infrastructure investment is more pronounced for companies with greater default risk and lower accounting quality. Finally, we provide evidence of the economic outcomes of digital infrastructure development, indicating that the profitability of the treated firms increases with a more dispersed debt structure following the implementation of the “Broadband China” strategy. Overall, this study offers novel insights into the financial implications of digital infrastructure investment in China, particularly in terms of facilitating information acquisition.

Too Good to be Nice: The interplay between the Cause marketing and information acquisition.

Cause marketing (CM) has become an important tool for firms to fulfill their social responsibility strategies. However, in reality, although some consumers have responded positively to the firm's CM strategies, others have doubts due to their lack of trust in the effectiveness of the firm or business. Therefore, in this paper, we consider a case that the supplier is a dual-purpose corporation that engage in a CM campaign and the consumer social preference is uncertainty and is unknown initially but can be resolved by the retailer's acquisition behaviour. By examining the two information acquisition strategies: committed acquisition and contingent acquisition. We find that, under either strategy, the retailer would like to acquire information only when the cost of information acquisition is small. Moreover, compared to contingent acquisition, the retailer is more willing to prefer committed acquisition. Additionally, we show that the supplier always prefers the committed acquisition strategy. However, the retailer's preference toward these two information acquisition strategies is related to the acquire cost. Specifically, when acquisition cost is small or large, the retailer is indifferent between these two strategies, when acquisition cost is in an intermediate range, the retailer will shift her strategy from the contingent strategy to the committed strategy. We also use numerical studies to illustrate main results. These findings provide theoretical support and management insights for managers to integrate CM into business transactions.

Tech-Enabled Financial Data Access, Retail Investors, and Gambling-Like Behavior in the Stock Market

Advancements in technology have reduced information acquisition costs, creating an improved information environment for retail investors. Specifically, new technologies, such as application programming interface (API), deliver high-volume, institutional-like raw data directly to Main Street investors. Although greater availability of information can be beneficial, it may also exacerbate retail investors’ existing trading deficiencies. Exploiting the sudden shutdown of Yahoo! Finance API, the largest free API for retail investors, this study examines how access to tech-enabled raw financial data affects retail investment. We find that retail trading volumes in stocks favored by active retail investors dropped by 8.6%–10.5% within one month of the API shutdown. The remaining retail trades collectively became more predictive of future returns, suggesting less gambling-like behavior after the API shutdown. Moreover, our randomized controlled experiment affirms the underlying mechanism: tech-enabled access to high-volume historical price data increases individuals’ overconfidence, which further leads them to engage in excessive trading. The study reveals an unintended consequence of technology-led, wider data access for retail investors. This paper was accepted by D. J. Wu, information systems. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01379 .

Benefiting from bias: Delegating to encourage information acquisition

A principal delegates decisions to a biased agent. Payoffs depend on a state that the principal cannot observe. Initially, the agent does not observe the state, but he can acquire information about it at a cost. We characterize the principal's optimal delegation set. This set features a cap on high decisions and a gap around the agent's ex ante favorite decision. The set may even induce ex-post Pareto-dominated decisions. Under certain conditions on the cost of information acquisition, we show that the principal prefers delegating to an agent with a small bias than to an unbiased agent.

Information and selling mode strategies in a supply chain with an outsourced private label product

AbstractThis paper examines the interplay between the information strategy of an e‐commerce platform and the selling mode strategy of a manufacturer within a co‐opetitive supply chain, as well as the identification of the optimal supply chain strategy. We develop a supply chain model where a platform outsources production of its private label product to a manufacturer, who also sells its national brand product through the platform. The platform must decide whether to acquire consumer quality preference information at a cost and share it with the manufacturer, while the manufacturer needs to choose between the reselling mode or the agency selling mode for its national brand product. The two driving effects (competition‐intensification effect and mode differentiation effect) are identified. Our findings show that the platform will acquire and share information when the acquisition cost is sufficiently low, leading to the “competition‐intensification effect.” Additionally, the manufacturer prefers the agency selling mode when cost‐quality efficiency is low, and the reselling mode otherwise, driven by the “mode differentiation effect.” In cases where information sharing is absent, the manufacturer is more likely to choose the agency selling mode. Interestingly, when the cost‐quality efficiency of the manufacturer's product is moderate and the information acquisition cost is low, the “competition‐intensification effect” and the “mode differentiation effect” offset each other, resulting in the expansion of the region where the manufacturer chooses the reselling mode due to the platform's information‐sharing strategy. As a result, this enhances a cooperative relationship between the manufacturer and the platform. We also derive the optimal supply chain strategy, providing insights into both the manufacturer's selling mode and the platform's information strategies in online retailing.

Impact of blockchain technology on supply chain collaboration: A case study of JD Chain

This study uses JD.com as a case study to explore blockchain technology’s application in supply chain management. By leveraging distributed ledgers, consensus mechanisms, smart contracts, and cryptographic techniques, blockchain effectively tackles problems related to privacy protection, information traceability, and authenticity within traditional supply chains. This paper examines JD’s blockchain framework and its impact on various supply chain functions, revealing that blockchain technology has markedly improved procurement efficiency, reduced costs, enhanced customer trust and sales revenue, optimized logistics operations, and streamlined management processes. Through its JD Chain platform, JD.com has boosted operational performance and economic value and offered valuable insights for smaller enterprises. Given the technical and financial constraints faced by smaller firms, it is recommended that they engage in open source blockchain communities hosted by larger organizations to lower information acquisition costs and share resources. This paper provides practical advice for enterprises considering the integration of blockchain technology into their supply chain management.

School choice with costly information acquisition

I study a model of centralized school choice in which students engage in costly search over schools before submitting preference reports to a clearinghouse. I consider three classes of preferences over schools—idiosyncratic, common, and hybrid—and characterize outcomes under two search protocols—simultaneous and sequential. With idiosyncratic preferences, there are no search externalities, and inefficiencies arise only because of uncoordinated search. Common preferences, however, generate search externalities: when high-priority students search, seats available to lower-priority students are adversely selected. Consequently, sequential search generates greater welfare than simultaneous search with idiosyncratic preferences but not necessarily with common. Additionally, with common preferences, welfare is nonmonotonic in search costs. I also show that the search protocol affects outcome inequality in important ways. For both protocols, I provide an instrument by which a designer can break students' indifferences in search strategies to coordinate search and increase welfare.

Dynamic Persuasion and Strategic Search

Consumers frequently search for information before making decisions. Because their search and purchase decisions depend on the information environment, firms have a strong incentive to influence it. This paper endogenizes the consumer’s information environment from the firm’s perspective and endogenizes the search decision from the consumer’s perspective. We consider a dynamic model where a firm sequentially persuades a consumer to purchase the product. The consumer only wishes to buy the product if it is a good match. The firm designs the information structure. Given the endogenous information environment, the consumer trades off the benefit and cost of information acquisition and decides whether to search for more information. Given the information acquisition strategy of the consumer, the firm trades off the benefit and cost of information provision and determines how much information to provide. This paper characterizes the optimal information structure under a general signal space. We find that the firm only smooths information provision over multiple periods if the consumer is optimistic about the product fit before searching for information. Moreover, if the search cost for the consumer is high, the firm designs the information such that the consumer will be certain that the product is a good match and will purchase it after observing a positive signal. If the search cost is low, the firm provides noisy information such that the consumer will be uncertain about the product fit but will still buy it after observing a positive signal. This paper was accepted by Dmitri Kuksov, marketing. Funding: This work was supported by University of California, Berkeley, the Institute for Business Innovation [Research Grant], and the Center for Equity, Gender, and Leadership [Research Grants]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.00994 .

Public data access and stock price synchronicity: Evidence from China

This paper investigates how public data facilitates financial market informativeness. The increasing information efficiency in digital economics has raised great attention in extant literature. Using the staggered difference-in-differences approach, we investigate how public data access enhanced by establishing governmental public data platforms affects stock price synchronicity, measured by the relative importance of firm-specific information to market-level information capitalized into stock prices. We find that public data access significantly reduces local firms' stock price synchronicity. The underlying mechanism is that public data access mitigates information-acquisition costs and facilitates the incorporation of firm-specific information into investors' decision-making rather than increased market attention or corporate disclosure quality. Public data platforms’ informational role is magnified when investors face higher informed trade risk or concern about poor corporate governance. Under the urgent need for value realization of data elements, we provide essential implications in promoting public data opening to improve financial market efficiency.

Why Some Investors Avoid Accounting Information: Identifying a Psychological Cost of Information Acquisition Using the Securities-Based Crowdfunding Setting

ABSTRACT We conduct an experiment in the securities-based crowdfunding setting to investigate whether some investors avoid accounting information for psychological reasons, even when they understand the information is useful in their decision-making. Results suggest investors who experience relatively more psychological discomfort when working with quantitative information are relatively less likely to acquire the financial statements of a potential crowdfunding investment. Importantly, this effect is incremental to any effect of investors' quantitative ability (i.e., their numeracy) and attenuates with an intervention designed to help investors overcome their psychological discomfort. Altogether, the results extend our understanding of the theory of information avoidance, provide a behavioral explanation for investors' documented underuse of accounting information, and can inform regulators as they revise crowdfunding regulations. JEL Classifications: G11; G41; M41.

Accounting conservatism and managerial information acquisition

We study the interaction between optimal financial reporting rules and managers' incentives to gather additional information about firm performance. Accounting-based covenants transfer control rights to lenders, allowing them to take corrective actions. After the accounting report is released, the manager can exert effort to uncover whether the report is a false alarm or unduly optimistic. The manager's incentive to gather information stems from optimal incentive contracts and private benefits of control that she loses when the project is liquidated. We derive conditions under which managerial information acquisition renders conservative reporting optimal for shareholders and show that these conditions relax when the manager derives greater private benefits from the project or the cost of information acquisition declines. Our model provides novel explanations for existing empirical findings and offers new predictions with respect to covenant waivers, debt contract renegotiations, and the frequency of corrective actions.

COSTLY INFORMATION AND SOVEREIGN RISK

AbstractThe consequences of costly information acquisition for sovereign risk are explored in a quantitative sovereign default model. We identify information costs empirically using Bloomberg news‐heat data. The calibrated model microfounds heteroskedasticity in the country risk spread as measured by a novel metric we call the Crisis Volatility Ratio (CVR). Crises are endogenously more volatile because more information is acquired and priced. Recalibrated extant models do not generate CVRs in the empirical range, but ours does. Because effective risk tolerance depends on the information set, the model also suggests that risk premia fall with information costs.

Independent directors’ information acquisition and corporate innovation: Evidence from corporate site visits

This study investigates how independent directors’ information acquisition affects corporate innovation. Exploiting a unique dataset from the Chinese market, we document that firms patent more and have more high-quality technical patents after independent directors conduct corporate site visits. The positive relation is more pronounced for firms with stronger external governance, higher information acquisition cost, greater advisory needs, and more independent directors having innovation backgrounds. The results are robust when we address the endogeneity concerns, use alternative measures of patent output, and examine citations. Our findings suggest that independent directors’ advisory function is more effective when they have better access to firm-specific information, and provide new evidence on the relation between information asymmetry and the effectiveness of independent directors in corporate governance.