Decrease Information Asymmetry Research Articles

Resolving Information Asymmetry Through Contractual Risk Sharing: The Case of Private Firm Acquisitions

ABSTRACTWhen private firms are acquired, buyers commonly rely on seller financing and earnouts. Using a novel database of private acquisitions, I find that seller financing and earnouts become more common as information asymmetry increases between the acquirer and the target. Financial statement audits of the targets attenuate these results, which suggests that audits decrease information asymmetry in firm acquisitions. Seller‐financed acquisitions also close faster and at higher prices, reducing the private firm discount. These findings suggest that these contract structures are an important channel through which privately held firms mitigate adverse selection that arises from information asymmetry.

Information Asymmetry and Insurance in Africa

ABSTRACT In this study, we assess the relevance of decreasing information asymmetry on life and non-life insurance consumption, by using data from 48 African countries during the period 2004–2014. Reduced information asymmetry is proxied by information sharing offices, namely: public credit registries and private credit bureaus. The empirical evidence is based on the Generalized Method of Moments. The findings show that information sharing offices increase insurance consumption with a comparatively higher magnitude in life insurance penetration, relative to non-life insurance penetration. Practical and theoretical implications are discussed.

Executive Board Member Financial Expertise and IPO Performance

SYNOPSIS Chief executive officers (CEOs) and chief financial officers (CFOs) can serve on the boards of the firms that employ them. We investigate the effects of having these executive board members, and the effects of their financial expertise (FE), on initial public offering (IPO) outcomes. Specifically, we investigate the effects of three types of executive board member financial expertise: that obtained via prior accounting-based, user-based, and supervisory-based work experience. The results suggest that executive board members with accounting-based experience use their knowledge and experience to decrease information asymmetry at the IPO, leading to lower underpricing. Neither of the other two types of FE helps to improve IPO underpricing. We also find that executive board members with accounting-based experience are associated with shorter IPO preparation times, and less downward IPO offer price adjustments. JEL Classifications: G32; G34; M41.

Impact Signals: A Study on Emerging Market Multinationals’ Ownership Strategies in Advanced Markets

Drawing on signaling and institutional theory, we perform an analysis of emerging market multinational enterprises’ ownership strategies in advanced markets. Specifically, we claim that experience-related information, i.e. signals, disseminated by the acquirer will decrease information asymmetry on the target side of the deal, leading to majority acquisitions. Furthermore, we find that informal institutional distances decreases the positive impact of signals and formal institutional distance further decreases the negative impact of signals, enhancing our understanding of the boundary conditions of the signal environment as well as how emerging market acquirers can navigate their actions in advanced markets. We rely on a dataset of over 2,000 acquisitions undertaken by acquirers from emerging markets in advanced markets during the period 1999-2017.

Economic Consequences of IFRS Adoption: The Role of Changes in Disclosure Quality

This study adopts a two-step approach to highlight the disclosure quality channel that drives economic consequences of International Financial Reporting Standards [IFRS] adoption. This approach helps address the identification challenge noted by Leuz and Wysocki (2006) and offer direct evidence on the role of disclosure quality. In the first step, we document the impact of the IFRS mandate on changes in disclosure quality proxied by the granularity of line-item disclosure in financial statements. We find that IFRS-adopting firms provide more disaggregated information upon IFRS adoption, such as more granular disclosure of intangible assets and long-term investments on the Balance Sheet and greater disaggregation of depreciation, amortization, and non-operating income items on the Income Statement. In the second step, we link the observed disclosure changes to the benefits and costs of IFRS adoption. We show that greater disaggregated information due to IFRS adoption enhances market liquidity and decreases information asymmetry, but does not affect audit fees differentially. Our evidence has implications for standard-setters as they evaluate cost-benefit tradeoffs when considering disclosure changes in the future.

THE XBRL TECHNOLOGY AND MARKET EFFICIENCY IN BANKING COMPANIES LISTED ON THE INDONESIA STOCK EXCHANGE (IDX)

The problem in this research is the need for fast and accurate information in the format of the presentation of financial statements resulting in the distribution of information, and data management can be problematic. Therefore, a format for financial reporting systems, namely Extensible Business Reporting Language (XBRL), was formed. The purpose of this study was to determine the effect of XBRL technology, stock prices, Return on Assets (ROA), and institutional ownership on market efficiency (information asymmetry and stock trading volume). The population and sample of this study are banking companies listed on the Indonesia Stock Exchange from 2015-2016. The sampling method using a purposive sampling method and obtained a sample of 42 companies. Data collection techniques are carried out by taking data from the Indonesia Stock Exchange website (www.idx.co.id) and the site http://finance.yahoo.com. Data were analyzed with multiple regression tests after being declared normal with the normality test and though using SPSS 20. The results of this study simultaneously stated that XBRL technology, stock prices, ROA, and institutional ownership together have an influence on information asymmetry and stock trading volume. From the results of the study, it can be concluded that XBRL technology, stock prices, ROA, and institutional ownership cause a decrease in the level of information asymmetry and trading volume. This result also states that the company is in excellent condition when the value of information asymmetry decreases, but it is not good when the trading volume of its shares also decreases. Keywords: XBRL Technology; Stock Prices; Market Efficiency; Information Asymmetry; Stock Trading Volume.

Do disclosures of selective access improve market information acquisition fairness? Evidence from company visits in China

Following an exogenous regulation change in China, we examine the impact of company visit disclosures on the fairness of market information acquisition. Before July 2012, company visits to Chinese listed firms were vaguely disclosed in annual reports long after they were conducted. After that, they were disclosed in detail within two trading days of their completion. Market reactions around visits are much stronger and more predictive of firms' future earnings if visits occurred after July 2012 and, thus, were disclosed in a timelier and more detailed manner. The timely disclosure of visit details also improves the forecast accuracy of non-visiting analysts, reduces forecast dispersion among analysts, and weakens the relative information advantages of visiting analysts. Because of this, visits are more concentrated on firms with poorer information environments, larger sizes, and manufacturing firms after July 2012, i.e., firms offering visitors larger potential benefits. In summary, the timely disclosure of visit details improves the fairness of information acquisition and decreases information asymmetry while causing information chilling effects for firms that provide fewer potential benefits to visitors.

Smart Precision Finance for Small Businesses Funding

Small businesses are at the heart of most economies. Yet their combination of high risk and opacity with uncertain return dissuades banks and other investors from providing the necessary financial backing to get a business off the ground. Overcoming the significant asymmetries of information is simply not seen as worth the high transaction costs required. Technology—particularly digitalization and data analytics—has in recent years lowered the transaction costs of small business lending through automated systems capable of analyzing varied data sources indicative of the borrower’s solvency and stability. Ownership of this data by large service providers has, in this new market, tended to indicate a potential capture of small business borrowers by the lending firms with the largest networks. This paper sketches the parameters of an application for the ‘smart precision financing’ of small businesses, through an analysis of the legal and technological innovations that could be introduced to make such financing simpler while allowing the market to retain dynamism, thus increasing funding and funding options available to small businesses. The precision financing concept seeks to decrease information asymmetry and transaction costs while also limiting agency risk of a borrower misapplying funds. The recommendations offered are also designed to be complementary to eventual business growth toward venture capital investment.

PENGARUH PENGUNGKAPAN OTHER COMPREHENSIVE INCOME TERHADAP ASIMTERI INFORMASI YANG DIMODERASI OLEH KUALITAS AUDIT PADA PERUSAHAAN SEKTOR KEUANGAN YANG TERDAFTAR DI BEI TAHUN 2012-2016

ABSTRACT The changes in accounting standards in Indonesia that use international-based standards are the focus of important attention for company management, because company management has to report other comprehensive income. Other comprehensive income components contain high assumptions, estimations, and judgments from the management, therefore high audit quality is being able to support a decrease in information asymmetry. This study aims to analyze the effect of disclosure of other comprehensive income on information asymmetry in financial sector companies listed on the Indonesia Stock Exchange in 2012-2016. This type of research is descriptive verification. The dependent variable in this study is information asymmetry. The independent variable in this study uses the OCI ratio, while the audit quality as a moderator variable uses a dummy variable, where the big four KAP is given value of 1 and the non-big four KAP is given a value of 0. The control variable is the size of the company measured by natural asset logarithms. This study uses secondary data, namely financial data sourced from the website. The results of the study through the F test is a significant value of 0.003 (<0.005). Keywords: other comprehensive income, information asymmetry, audit quality, company size.

Effects of FinTech and Crowdsourced Forecasting on Firms: Evidence from Estimize

This paper examines whether and how coverage from a unique crowdsourced financial estimates platform, Estimize, affects firms. Employing a difference-in-difference design comparing firms that gain coverage from Estimize with firms that do not, I find that covered firms experience decreased information asymmetry, implying that Estimize provides useful information to the market. I also provide evidence of a visibility effect, as the breadth of institutional ownership increases following initiation of Estimize coverage. In addition, firms gaining Estimize coverage become more likely to engage in real earnings management and issue downwards quarterly earnings guidance, suggesting increased pressure effects from Estimize coverage. However, I find no monitoring effects of Estimize on firms’ financial reporting and future firm performance. Lastly, I find that firm value significantly increases upon Estimize coverage, and that the driving channels are reduction of information asymmetry and increased visibility. Furthermore, the effects of Estimize coverage on firm outcomes appear to be more pronounced when a firm has zero analyst coverage. Taken together, the evidence in this paper suggests that crowdsourced forecasting affects firms through various channels, most notably through decreasing information asymmetry, increasing visibility and pressure, but that the net effect on firm value is positive.

Information Asymmetry and Insurance in Africa

In this study, we assess the relevance of decreasing information asymmetry on life and non-life insurance consumption, by using data from 48 African countries during the period 2004-2014. Reduced information asymmetry is proxied by information sharing offices, namely: public credit registries and private credit bureaus. The empirical evidence is based on the Generalised Method of Moments. The findings show that information sharing offices increase insurance consumption with a comparatively higher magnitude in life insurance penetration, relative to non-life insurance penetration. Practical and theoretical implications are discussed.

The Joint Cross Section of Option and Stock Returns Predictability with Big Data and Machine Learning

Which market has leading informational advantage: stocks or options? Using large set of stock and option characteristics, and machine learning, we provide a comprehensive analysis of which characteristics are the first order importance predictors of options and stock returns. First, we find that options, rather than stock, characteristics are dominant predictors of options returns. Second, options, rather than stock, characteristics are also dominant predictors of stock returns. Consistent with the argument that an increase in trading activity in derivatives decreases information asymmetry about the underlying, options illiquidity is identified as the most important predictor of both stock and options returns.

The working experience of internal control personnel and crash risk

Purpose : This study examines The impact of human resource investment in internal control on stock price crash risk. Effective internal control ensures that information provided is complete and accurate, financial statements are reliable. By overseeing management, internal control systems can reduce agency costs between management and outside parties. In Korea, firms have to disclose information about internal control systems. The working experience of human resources in internal control systems is also provided for interested parties. If a firm hires more experienced internal control personnel, it can better facilitate the disclosure of information. Prior studies reported that information asymmetry between managers and investors increases future stock price crash risk. Therefore, the longer working experience internal control personnel have, the lower probability stock crashes have. Research design, data and methodology : This study analyzed the association between the working experience of internal control personnel and crash risk using regression analysis on KOSPI listed companies for fiscal years 2016 through 2017. The sample consists of 1,034 firm-years of non-financial firms whose fiscal year end on December 31. Career spanning data of internal control personnel was collected from internal control reports. The professionalism(IC_EXP) was measured as the logarithm of the average working experience of internal control personnel in months. Negative conditional skewness(NSKEW) and down-to-up volatility (DUVOL) are used to measure firm-specific crash risk. Both measures are based on firm-specific weekly returns derived from the expanded market model. Results : We find that work experience in internal control environment is negatively related to stock price crashes. Specifically, skewness(NSKEW) and volatility (DUVOL) are reduced when firms have longer tenure of human resources in internal control division. The results imply that firms with experienced internal control personnel are less likely to experience stock price crashes. Conclusions : Stock price crashes occur when investors realize that stock prices have been inflated due to information asymmetry. There is a learning effect when internal control processes are done repetitively. Thus, firms with more experienced internal control personnel could manage their internal control more effectively. The results of this study suggest that firms could decrease information asymmetry by investing in human resources for their internal control system.

Smart Precision Finance for Small Businesses Funding

Small businesses are at the heart of most economies. Yet their combination of high risk and opacity with uncertain return dissuades banks and other investors from providing the necessary financial backing to get a business off the ground. Overcoming the significant asymmetries of information is simply not seen as worth the high transaction costs required. Technology – particularly digitalization and data analytics – has in recent years lowered the transaction costs of small business lending through web portal loan application systems and automated systems capable of analyzing varied data sources indicative of the borrower’s solvency and stability. Ownership of this data by large service providers has, in this new market, tended to indicate a potential capture of small business buyers by the lending firms with the largest networks. This paper sketches the parameters of an application for the ‘smart precision financing’ of small businesses, through an analysis of the legal and technological innovations that could be introduced to make such financing simpler while allowing the market to retain dynamism, thus increasing funding and funding options available to small businesses. The precision financing concept seeks to decrease information asymmetry and transaction costs while also limiting agency risk of a borrower misapplying funds. The recommendations offered are also designed to be complementary to eventual business growth toward venture capital investment.

The Information Role of Comment Letters: Evidence from Institutional Investors’ Informed Trading

We use a unique data set of 6,954 firm-year observations to investigate the information content of comment letters released by the Shenzhen Stock Exchange (SZSE). The information role appears to be negatively associated with institutional investors’ informed trading. The comment letters, which increase more media coverage, decrease the institutional investors’ informed trading. Our results are robust across alternative measures and the propensity score matching (PSM) method. The negative relationship is more pronounced in firms with low analysts’ coverage, non-big 4 auditors, non-SOEs, and transient institutional investors. Our results suggest that comment letters are able to decrease information asymmetry and the stock exchange can play an active regulatory role to improve the stock market.

Did SFAS 166/167 decrease the information asymmetry of securitizing banks?

AbstractBeginning in 2010, mandated Financial Accounting Standards No. 166 and 167 (SFAS 166/167) changed the consolidation rules of securitization entities and required more information about their securitization activities. I find that securitizing banks experienced a decrease in information asymmetry from the pre‐ to the post‐SFAS 166/167 periods, and that more visible securitizing banks are less sensitive to SFAS 166/167. These inferences are robust to a number of sensitivity analyses. This study is one of the first to provide evidence of the effects of SFAS 166/167 on the information asymmetry of securitizing banks.

R&amp;amp;D Investments and Forward-Looking Disclosures

The immediate expensing of R&D expenditures conceals managers' knowledge about the R&D projects. I examine whether higher R&D-intensive firms voluntarily guide more to decrease this information asymmetry. R&D state tax credits serve as instrumental variable for R&D investments. While total earnings guidance remains unchanged, managers issue more quarterly earnings guidance and non-earnings guidance in lieu of annual earnings guidance. Consistent with uncertainty affecting the precision of longer-term earnings expectations, the substitution of quarterly guidance for annual guidance intensifies with innovation uncertainty. Difference-in-differences analyses around unexpected R&D jumps confirm that the increase in quarterly guidance derives from increases in information asymmetry. These findings demonstrate that firms trade off incentives to decrease information asymmetry with costs of uncertainty from R&D investments by issuing more quarterly and non-earnings guidance but reducing their annual earnings guidance. In conclusion, these results imply benefits of short-term earnings guidance when R&D investments discourage annual earnings guidance.

Minimum corporate website disclosure levels and information asymmetry: Evidence from Johannesburg Stock Exchange small-cap companies

The use of corporate websites as communication medium may contribute to good governance and specifically transparency as one of the basic principles of governance, mitigating the effect of the agency problem. The primary objective of this study was to ascertain the link between voluntary corporate website disclosure and information asymmetry for the smallest JSE-listed companies. Rule 26, as issued by the LSE for its AIM-listed companies, was used as proxy for disclosure while the bid-ask spread stood as a proxy for information asymmetry. The results of a content analysis showed that the majority of smaller listed JSE companies are not on par with their UK counterparts. Using agency theory, it was argued that if information voluntarily disclosed by companies on their corporate websites is useful to investors, it should theoretically decrease information asymmetry. Although empirical evidence of a negative relationship between disclosure and the bid-ask spread was found, the relationship changed to not significant once controlled for market capitalisation. Besides the bid-ask spread, the association between disclosure and both share price volatility and share turnover (both as alternative proxies for information asymmetry) was tested, and both were found non-significantly related to disclosure. The results reported do suggest that the Rule 26 minimum corporate website disclosures may not be sufficient in persuading investors to change their trading behaviour. Although there has been no research on the voluntary compliance and effect of Rule 26 website disclosure on information asymmetry using JSE small-cap data, a major limitation of this study is that generalisation of results is limited to small listed companies.

The Asymmetric Private Information Mask: A Comparative Analysis of Private Equity Bids and Tender/Merger Offers

Increased regulation imposed by the Securities and Exchange Commission to mitigate selective disclosure has led to a rise in private equity funds as an alternative to developed market investments. The extent of any informational advantage that participants gain through selective disclosure (due to the comparatively lower oversight of selective disclosure surrounding private equity transactions) remains contentious. This study tests whether private equity target firms exhibit differences in adverse selection costs due to informed trading pre- and post-announcement, relative to tender/merger target firms. The analysis employs the probability of informed trading derived from market bid-ask spreads. Private information may result in increased insider trading as investors seek to maximise profits, acting on private company information. On the other hand, anticipated profit from insider trading may be negated due to the time taken to convert private information into monetisable assets. This study finds a significant decrease in the probability of informed trading in the post-announcement period for private equity bid targets relative to tender/merger offer targets. This result is interpreted as decreased information asymmetry post-announcement for private equity bid targets relative to tender/merger offer targets.

Consumers’ and farmers’ characteristics in short food supply chains: an exploratory analysis

A “farmers’ market” identifies a common area where farmers meet periodically to sell food products which do not need to be processed before consumption. Farmers’ markets have recently experienced steady growth mainly due to increasing demand for traditional foods and rising consumers’ interest towards locally produced food products. It is also the case that they provide transparency along the supply chain and decrease information asymmetries. This study attempts to define the farmers and consumers of farmers’ markets in terms of both their socio-demographic and their attitudinal characteristics. Data gathering was performed carrying out face-to-face interviews with sixty farmers and consumers. The study findings show that the majority of consumers purchasing at farmers’ markets are women, with an average age of 49 and with a high level of education. They attach great value to the availability of fresh and organic products with a good value for money. Farmers, by contrast, are mainly male, with an average age of 45 years, a high school degree and several years of experience in farming. They value more the creation of a direct and durable relationship with consumers in order to convey information about the quality and authenticity of their products. The study offers useful implications to policy makers on how to encourage the creation of farmers’ markets as well as spread the shared value created among farmers and consumers.