Decrease Information Asymmetry Research Articles

The impact of corporate digital transformation on stock market activity: evidence from the Chinese listed manufacturing companies

Purpose This research aims to investigate the impact of corporate digital transformation (CDT) on stock market activity. Design/methodology/approach A data set of Chinese listed manufacturing enterprises from 2012–2021 is used as a research sample. Findings This research finds that CDT can promote stock market activity. This study validates two potential mechanisms: increasing financial performance and mitigating information asymmetry. This study further suggests that internal control and analyst coverage can strengthen the impact of CDT on stock market activity. Research limitations/implications The research exhibits certain limitations that should be considered in future research. Because the findings are based on the Chinese context, the applicability and generalizability of the findings to other environments may be limited. This research enriches the literature on the determinants of stock market activity from a technological perspective and incrementally contributes to understanding the impact of CDT on stock markets. After analyzing two opposing perspectives on the economic consequences of CDT, the favorable effect of CDT on stock market activity is proven based on the resource-based view and agency theory. This research extends the literature on the relationship between CDT and investor behavior, demonstrating that investors perceive CDT as beneficial. The results provide evidence that CDT can increase financial performance and improve the information environment, leading to increased investor attention and enhanced trading activity. Practical implications This research has incremental practical implications for enterprises and regulatory authorities to comprehend the economic consequences of CDT in developing countries. First, enterprises should increase their digital investments to improve their performance and decrease information asymmetry. Furthermore, enterprise managers should strengthen information systems to adapt to the process of CDT and train employees on digital skills. Second, regulatory authorities should provide comprehensive digital policies and programs supported by tax incentives, subsidies and digital infrastructure projects (Wang et al., 2023). Originality/value This research strengthens the debate on the market impact of CDT. Unlike prior literature, this study explores the influence of CDT on stock market activity for the first time, enriching the literature on CDT and stock market activity. Furthermore, the outcomes guide regulatory authorities to actively support CDT and expedite the digital upgrading of manufacturing industries to promote stock market activity.

Can companies' input of data factor eliminate investors' home biases?

Data as a new production factor plays an increasingly crucial role in influencing investor decision-making. This paper investigates how the data factor input, measured using a two-stage regression decomposition approach, impacts investors' home biases. Analyzing a sample of Chinese listed companies from 2012 to 2022, we find that: 1) companies' input of data factor effectively reduces investors' home biases; 2) this reduction is primarily driven by a decrease in information asymmetry; 3) the mitigating effect of data factor input is further strengthened by external factors such as heightened attention from analysts and stronger corporate governance. Additionally, our results reveal that this mitigating effect is more pronounced among companies facing high financing constraints, possessing low reputations, operating in low-technology industries, or located in regions with underdeveloped digital financial infrastructure. These findings offer new insights into underscore the critical role of data factor in shaping capital markets.

Artificial intelligence as a core of the new industrial revolution: prospects and limitations

The purpose of the article is to define prospects and limitations of artificial intelligence as a core of in the new industrial revolution. The definition of the concept of AI in the scientific community remains the subject of heated debate. At the same time, in the regulatory and legal plane, a trend is being formed towards unification of the concept of AI. Based on the analysis conducted and literary sources, the following prospects for AI can be identified on theoretical and practical levels. On theoretical level: (1) alienation of tacit knowledge from the individual (employee and entrepreneur); (2) optimization of the planning system; (3) revision of the socialist-calculation debate; (4) decreasing information asymmetry. On practical level: (1) formation of new products and markets; (2) increasing labor and capital productivity; (3) massive creation of new jobs; (4) optimization of business processes; (5) opportunity for rapid growth for small businesses and startups. Limitations: (1) long-term structural unemployment; (2) inflated expectations from AI and, as a consequence, the possible formation of a speculative bubble in the global stock market; (3) energy consumption of AI; (4) outdated pre-AI corporate culture and regulatory environment. Further improvement of AI (including the transition from AI to AGI) and the expansion of its use can make a significant contribution to solving problems related to economic calculation and minimizing information asymmetry, and therefore optimizing transaction costs in the economy. AI, certainly acting as a locally useful tool at the level of individual enterprises and organizations, causes the acceleration of attracting funds to the stock market, which can lead to the formation of a bubble on global level. If this bubble bursts, expectations about the economic efficiency of AI will be revised, and some AI-related companies will experience significant margin reductions (perhaps losses and bankruptcies). But this, in turn, will initiate the next stage of AI development, will accelerate its transition from the current narrow specialization to the creation of full-fledged general artificial intelligence (artificial general intelligence), which has a greater potential to change the economy at all levels. As a result, AI will become established as the core of the new industrial revolution.

Information flow and investment cash flow sensitivity

ABSTRACT In this paper, we examine whether firms with greater information flow, i.e. which reveal more firm-specific information through their idiosyncratic stock price movements, are associated with lower investment cash flow sensitivity. Using a sample of 450 French non-financial firms over the period 2006–2022, we find results consistent with the idea that greater information flow decreases information asymmetry, thus allowing firms to carry out investments more efficiently as they depend less on the availability of internal cash flows.

Information matters: The effectiveness of mixed-ownership reform in mitigating financial constraints

Due to the unhealthy principal-agent relationships prevalent in state-owned enterprises (SOEs), these enterprises often lack transparency in financial reporting and other critical information. Drawing on signaling theory, this study examines the impact of mixed-ownership reform (MOR) on financial constraints in Chinese SOEs. Using data from listed manufacturing SOEs between 2009 and 2019, we find that every 0.1 increase in the proportion of non-state shareholders, a proxy for MOR intensity, is associated with an average 2.34 ‰ reduction in financial constraints. This mitigation in constraints primarily arises from decreased information asymmetry between enterprises and the external capital market. Specifically, MOR promotes corporate information disclosure, which sends quality signals to investors, while simultaneously reinforcing corporate governance, which projects intention signals to capital markets. Notably, the effectiveness of MOR in alleviating financial constraints is more significant in capital-intensive and information-sensitive industries, as well as in central SOEs. These findings not only highlight the critical role of MOR in alleviating information asymmetry within SOEs, but also provide valuable insights for similar reforms aimed at advancing sustainable development of SOEs in other countries.

Impact of Ownership Structure and Dividends on Firm Risk and Market Liquidity

This article examines the impact of ownership structure and dividend payouts on idiosyncratic risk and market liquidity using agency, signaling, and bankruptcy theories from an emerging market perspective. The evidence shows that family firms dominate and have concentrated ownership, and dividend payouts are lower among family firms than their counterparts. The idiosyncratic risk is high among firms with higher family ownership concentration. The family ownership concentration and control positively influence the (firm) risk, dividends positively affect the market liquidity, and risk relates negatively to the market liquidity, supporting the entrenchment of the minority shareholders’ proposition that a significant payout leads to a decrease in information asymmetry and a lower level of risk. The study further supports the proposition that information asymmetries are central to elucidating the dynamics of dividend payouts and their effects on firm risk and market liquidity. The evidence confirms that family ownership concentration affects policy decisions, especially ownership control. The paper’s originality lies in factoring ownership concentration when analyzing how payouts affect firm risk and market liquidity from an emerging markets perspective where controlling shareholders enjoy substantial private benefits, whereas minority shareholders have limited protection.

Can the Presence of Big 4 Auditors in IPO Prospectus Reduce Failure Risk?

This paper addresses a void in the research on auditing and initial public offering (IPO) failure by investigating the impact of the Big 4 auditing firms on the likelihood of an IPO failure. This research is the first comprehensive analysis of more than 33,000 global IPOs that either failed or were successful between 1995 and 2019 across a wide range of nations with vastly different regulatory, cultural, and economic settings. A cross-sectional probit regression model is utilized to investigate the influence of hiring the Big 4 auditing firms on IPO failure, building upon prior studies on IPO failure. We found strong evidence that IPO failure rates were diminished by up to 67% when one of the Big 4 auditing firms was involved in auditing the IPO prospectus. For IPO founders, hiring Big 4 auditors before an IPO is a quality signaling strategy that minimizes the risk of a failed IPO by reducing information asymmetry among IPO participants. Our findings provide useful policy implications. Hiring one of the Big 4 auditing firms before an IPO is a reassuring signaling strategy for founders, since it decreases information asymmetry among IPO investors and so lowers the risk of the IPO failing. Primary market investors now have access to credible evidence indicating that backing IPOs from companies that use the Big 4 auditing firms increases the likelihood of such IPOs being listed on stock exchanges and yields positive returns. This is the first time, as far as the academicians are aware, that conclusive evidence has been found of a strong inverse association between the presence of Big 4 audits and failure risk for IPO firms. Our research could be helpful to primary market regulators since it shows how crucial it is to encourage Big 4 audits in IPO companies. The quality work of the Big 4 auditors does lower the risk of failure in the IPO market, which might help owners of small private equities to list their firms on the IPO market, boosting economic growth.

Open government data and resource allocation efficiency: evidence from China

ABSTRACT Data are among the most valuable resources. This paper, utilizing the China Tax Survey Database from 2009 to 2016, investigates the impact of Open Government Data (hereafter, OGD) on the efficiency of resource allocation among firms within the Chinese context. The findings indicate that OGD significantly reduces the deviation in firms’ factor inputs, thereby enhancing the efficiency of resource allocation. This is primarily achieved through the optimization of government-business relationships, the reduction of rent-seeking costs, and the decrease in information asymmetry. Given the inclusive nature of OGD, it has a more pronounced positive impact on disadvantaged firms and cities. Furthermore, while OGD directly improves representative firm’s TFP, its greater economic impact lies in elevating aggregate TFP by enhancing resource allocation efficiency. In the current global economy, highly dependent on data-driven processes, the conclusions of this paper provide a novel perspective on the role of OGD in enhancing productivity. This has significant implications for accelerating the implementation of open data policies and enhancing economic efficiency.

Analyst/Investor Days and Firms’ Information Environments

SYNOPSIS This paper investigates the impact of analyst/investor days on hosting firms’ information environments. The event allows for human interaction and information exchange among participants. Using hand-collected data, I document the impact of analyst/investor days on the hosting firms’ information environments in two different periods: an immediate effect around the time of the event and a persisting effect around future earnings announcements. First, I show that the inaccuracy of analysts’ forecasts for various forecast horizons significantly decreases around the event. Second, I find evidence that analyst/investor days decrease information asymmetry and improve analyst forecast quality around future earnings announcements. This result suggests that the information effects persist into the future and help investors and analysts better interpret future earnings releases. Overall, this study documents the forward-looking and multidimensional nature of information disclosed at analyst/investor days in the context of sequential disclosures. JEL Classifications: M41; G14; G24; G32.

الأثر المعدل للتحفظ المحاسبي على العلاقة بين عدم تماثل المعلومات وتكلفة رأس المال: دراسة تطبيقية على الشركات الصناعية المدرجة في بورصات دول مجلس التعاون الخليجي

The aim of this study is to identify the moderating effect of accounting conservatism on the relationship between information asymmetry and cost of capital. Since this issue is almost neglected in the emerging markets, especially in the Arab countries, the study uses data belongs to the industrial companies listed on the exchanges of the Gulf Cooperation Council (GCC) countries covering the 2015-2021 period. The results show that accounting conservatism moderates the positive effect of information asymmetry on the cost of capital. Therefore, companies may reduce cost of capital by decreasing information asymmetry and enhancing the use of conservative accounting practices. In particular, the level of disclosure and the efficiency of governance should be enhanced. Regulators can significantly contribute in this regard by issuing relevant regulations and improving the oversight over companies. Finally the study provides insights to be considered in the future research.

Does Using the Extended Audit Report Decrease Information Asymmetry in Family Firms?

Does Using the Extended Audit Report Decrease Information Asymmetry in Family Firms?

Does better firm information disclosure enhance institutional blockholder monitoring on information asymmetry? Evidence from 10-K readability

Using the Plain Writing Act of October 2010 as a source of exogenous variation in 10-K readability, we examine whether improvements in 10-K reports enhance institutional investor monitoring of firms' information environments. This study reveals that the negative association between institutional monitoring and information asymmetry is more robust when firms provide 10-K reports with enhanced readability. Since the implementation of the Act, the impact of improved readability on the relationship between institutional monitoring and information asymmetry has become increasingly pronounced. This finding confirms our hypothesis that improved readability provides better firm information for institutional investor monitoring of firms, thus decreasing information asymmetry.

A CROSS-COUNTRY NEWS COVERAGE AS A GROUND FOR A DEVELOPMENT OF AN INTEGRATED INFORMATION ENVIRONMENT IN THE KNOWLEDGE ECONOMY

Knowledge Economics is considered to lead the next economic cycles backed with information as a currency. The media are accounted to be one of the key economic actors to generate and to distribute information. As a result, an integrated information environment has a potential to increase information dissemination and therefore to decrease information asymmetry that is named to be one of the reasons for social inequality.This article aims to assess the merging processes of the Russian and Indian media systems for creation an integrated information space. The potential of news information agencies to accelerate information dissemination and to increase knowledge penetration in developing countries is examined. The local agenda is deduced to be one of the defining factors for a prospective development of an integrated information environment.

Does corporate sustainability mitigate firm risk? An empirical analysis on S&P 500 controversial companies

PurposeThis study aims to explore the impact of controversial firms’ corporate sustainability assessments on their risk exposure according to the environmental, social and governance (ESG) paradigm.Design/methodology/approachThis study conducts a cross-sectional study using the ordinary least squares approach to test how corporate social responsibility practices affect firms’ risk exposure, testing the three single impacts of ESG components and the impact of an overall ESG assessment. This study considers the largest Standard & Poor’s (S&P) 500 stock market index companies and focus on a double-risk measurement – systematic and idiosyncratic – developing an empirical study on 132 controversial companies listed on the S&P index.FindingsEmpirical findings indicate that the overall ESG assessment and the environmental and social sub-dimensions decrease idiosyncratic firm risk. At the same time, no significant results are found according to the systematic risk component.Originality/valueThis study fits into the domain of risk management research, investigating whether additional and non-financial disclosures regarding sustainability issues decrease information asymmetries, improving investors’ decision-making and stakeholders’ relations. Prior literature has shown limited evidence on the relationship between corporate social performance (CSP) and firm risk based on controversial companies. The main contribution is to consider the controversy as an independent factor from the industry sector, given that the implications of CSP actions and practices are mainly firm-specific.

The Impact of Adopting the Joint External Audit Approach on the Auditor's Opinion and its Reflection on Information Asymmetry: An Applied Study at Firms Registered on Amman Stock Market Exchange

The study aims to form a new model to examine the indirect effect of adopting the joint external approach on the auditor's opinion and its reflection on information asymmetry: an applied study on firm registered on Amman Stock Market Exchange (ASME) by considering auditor's opinion as mediator variable. The population sample used in the current study consists of 46 joint-stock companies from (ASME). data collection was conducted using the annual financial reports of the period (2015-2019), both descriptive and analytical tools are used, the SPSS and AMOS software program was used to test for the hypotheses. The study concludes that the new model is useful in explaining the indirect effect of joint auditing on information asymmetry. It finds that joint audits have a significant positive effect on the qualified auditor’s opinion. Joint audit has a significant negative effect on information asymmetry. Qualified auditor’s opinion has a significant negative effect on information asymmetry. Joint audit has a significant positive effect on the qualified auditor’s opinion and this effect leads to decreased information asymmetry. Consequently, this paper contributes to the limited literature by suggesting a new model for the effect of joint audit on auditor’s opinions and its impact on information asymmetry. Significant recommendations urged conducting more research and studies related to adopting the external joint auditing method on the auditor's opinion and its reflection on the inconsistency of information, which enhances interest in this subject.

Dual holding and bank risk

AbstractUsing the 2007–2009 financial crisis as a quasi‐natural experiment, we show that banks with investors holding simultaneously both equity and bonds (dual‐holders) exhibit lower risk and superior performance. Dual‐holders' influence is higher in more opaque banks, indicating that the mechanism of transmission is through a decrease in information asymmetry and a reduction in debtholder–shareholder conflict. This effect translates into higher unconditional and risk‐adjusted stock returns. These economically large results show that a market mechanism implemented by outside investors is strongly effective in mitigating excessive risk taking by banks thus providing important normative implications for the stability of financial systems.

DOES CORPORATE SOCIAL IRRESPONSIBILITY REPUTATION AFFECT ACCOUNTING-RELATED LIQUIDITY RISK?

ABSTRACT This study examines whether a firm’s CSIR reputation affects accounting-related liquidity risk in the stock market. Following Liu (2006)’s liquidity-augmented capital asset pricing model (LCAPM) and Chen et al. (2007) accounting-related liquidity risk, we find that a firm’s CSIR coverage is positively associated with accounting-related liquidity risk, indicating that investors expect higher compensation for liquidity risks that they bear when they invest in firms that have worsened CSIR reputation. The sensitivity tests show evidence that is consistent with the notion that high-risk firms tend to distribute more information to investors by engaging in CSR activities to retain a good reputation, decreasing information asymmetry between insiders and outsiders. This study provides a better understanding of the link between CSR performance and information asymmetry. Keywords CSIR reputation, liquidity risk, accounting quality, information asymmetry

핵심감사제의 도입이 수주산업의 이익반응계수에 미치는 영향

[Purpose] Since the introduction of the core audit system, a decrease in information asymmetry and an increase in audit quality have a positive effect on corporate value, and investors‘ disappointment in key audit matters and key audit matters such as accounting violations have a negative impact on corporate value. This research aims to analyze the impact of introduction of key audit matters(KAM) on earning response coefficient(ERC) for the company in the order industry since 2016. In addition, analyzing the difference of the ERC between order industry companies that report KAM and those do not report.
 [Methodology] this research analyzes if there is a difference in the ERC before and after the introduction of KAM. In addition, this research uses propensity score matching estimation(PSM) method, matching companies that reported KAM in the order industry with companies of similar characteristics but did not report KAM since 2016. And analyzes if there is a difference in the ERC between the two enterprise groups.
 [Findings] And the results are as follows. Firstly, compared to the past, there is a deduction of ERC in the order industry after the introduction of KAM. Secondly, companies who report KAM have a lesser ERC compared to companies who do not. As KAM is the most important matters during the auditing process of the financial statements, and it related to the risk of the enterprise. Therefore this research indicates the lack of ability to analyze the information of KAM from the investors may interfere with their investment decision, making them revaluate the risks of the company and loss of trust as a result.
 [Implications] This result is believed to have been caused by differences in expectations felt by investors as information on significant risks was forcibly disclosed with the introduction of the core audit system. Through this study, the information asymmetry was alleviated after the introduction of the core audit system, and the market value of the order-taking industry before the introduction of the core audit system could be overestimated.

Short-selling and mutual fund herding: The Chinese evidence

Using short-selling pilot programs in China as quasi-natural experiments, we investigate how short-selling impacts mutual fund herding. We find that mutual funds herd more on firms eligible for short-selling than those not. The effect is larger for firms with fewer media coverage, higher financial reporting opacity, or lower audit quality. Channel tests show that short-selling decreases information asymmetry proxied by informed trading and stock illiquidity. Additionally, short-selling strengthens the price impact of herding without causing reversals. Our findings fit the correlated signal theory: mutual funds receive more similar information on firms eligible for short-selling and, thus, herd more on them.

Quality of financial reporting, external audit, earnings power and companies performance: The case of Gulf Corporate Council Countries

Financial statement analysts are concerned about the earnings power of companies, thus reliable information from a quality external audit and financial reporting is important as it will have an effect on the performances of GCC companies. On that note, underpinned by the agency theory, this study examines the effects of financial reporting quality, audit quality, and earnings power on companies’ performances of the six Arabian GCC countries (Saudi Arabia, Bahrain, Oman, Qatar, Kuwait, and the United Arab Emirates). Company performance is measured using the accounting measures, i.e., return on assets and market-to-book value (ROA, M/B) and the market measures (Tobin’s Q, EPS). The data sample of this study covers the period between 2013 and 2017, (pre-covid-19), across 191 companies, using 1337 company-years observations. The study uses EGLS Panel Data Regression analysis. The results of the study indicate that earnings power, audit quality, and financial reporting quality have positive effects on companies’ performance. The agency theory confirms that financial reporting quality and audit quality increases the reliability of financial statements and decreases information asymmetry.