Degree Of Information Asymmetry Research Articles

Research on the asymmetric impact of EKOP model based on the concept of green development

Green economy as a new development model, its development has risen to the national strategic level. And enterprises as the main body of economic activities should also keep pace with the times and take green development as their basic value orientation. Based on the EKOP model, this paper uses eight stocks in the A-share airline industry, selects three first-order indicators, namely human capital characteristics, board characteristics and equity structure characteristics, to represent corporate governance characteristics, and uses the probability of informed trading to represent the degree of information asymmetry, and studies the influence of corporate governance on information asymmetry. The aim is to explore the relevance of each factor asymmetry and use its findings to serve the development of the green economy model and promote the standardization of corporate governance.

Managerial overconfidence, internal financing and investment

Corporate investment decisions are determined by a variety of factors, including various managerial measures, including overconfidence of managers, which are important determinants of corporate investment decisions. Most corporate executives prefer internal financing, but if internal resources are not sufficient to meet this need, they use external resources with the least degree of information asymmetry. The purpose of this study was to investigate the effect of managerial overconfidence on investment and the moderating effect of the internal financing method is on their relationship. The study consisted of listed companies in Tehran Stock Exchange during the period 2011 to 2016 and using a systematic elimination sampling method, 97 companies were selected. To investigate the research hypotheses, EVIEWS software and panel data regression method was used. The results of the research showed that managers’ overconfidence has a positive and significant effect on investment as well as underinvestment, but internal financing does not have a significant effect on the relationship between the overconfidence of managers and investment as well over-investment. But the effect of internal financing on the relationship between managers’ overconfidence and underinvestment was a significant positive. Finally, it became clear that internal financing had a significant negative impact on investment and over-investment.

Inter-Firm Connections, Alliance Formation and the Value Created by Alliances

We investigate the impact of inter-firm connections on alliances. We find that both professional connections and social connections, borne out of board interlocks, employment ties and educational ties, increase the likelihood of alliance formation. In addition, the market reacts more favorably to alliance announcements in the presence of such connections, and this positive valuation effect increases with the degree of information asymmetry between the partner firms. Our findings are consistent with inter-firm connections creating value because they facilitate the flow of information between partner firms, thereby reducing moral hazard concerns and the risk of ex-post opportunistic behavior.

Earnings management and earnings predictability: A quantile regression approach

This study argues that the managerial choice of earnings management strategy could be contingent upon a firm’s information asymmetry and such a strategy may affect the firm’s earnings predictability. Measuring information asymmetry by earnings predictability based on the subsequent industry-adjusted dispersion in analysts’ forecasts and employing a quantile regression to analyze 28,383 US firm-year observations from 1988 to 2014, this study reports that the effect of earnings management strategies on earnings predictability is nonuniform. Specifically, the amount of absolute discretionary accruals is negatively (positively) related to the subsequent industry-adjusted dispersion in the low (high) quantiles of analysts’ forecasts. These results support the hypothesis that a firm could implement earnings management strategies according to the degree of information asymmetry between the firm’s management and corporate outsiders. JEL Classification: G12, G32

Does the Underwriter Reputation Affect the Pricing of Local Government Bonds in China?

As the product of the combination of fiscal and financial, local government bonds should also follow the pricing mechanism of the securities market even under the special financial system in China. This paper uses Heckman's two-stage model to investigate whether the mechanism of underwriter reputation affects the pricing of local government bonds. The empirical results show that local governments tend to choose securities company underwriters with high reputation when they issue bonds with large scale, long maturity, and call right which have high degree of information asymmetry, and this tendency has an obvious time trend. However, high-reputation securities company underwriters failed to play the role of information intermediary to reduce the cost of local governments. On the contrary, implicit guarantees and government interventions induced the commercial banks to depress their quotations even leading to “interest rate upside down”, which resulted in the lack of securities company underwriters. In order to play the mechanism of underwriter reputation to promote the marketization of local government bonds pricing, this paper proposes to eliminate government interference, guide underwriters to strengthen the construction of their reputation, promote the marketization of underwriting fees and strengthen the supervision of underwriters.

Editorial for the Special Issue on Commercial Banking

The existence of financial intermediaries is arguably an artifact of information asymmetry. Beyond simple financial transactions, financial intermediation provides a mechanism for information transmission, which can reduce the degree of information asymmetry and consequently increase market efficiency. During the process of information transmission, the bank is able to provide unique services in the production and exchange of information. Therefore, banks have comparative advantages in information production, transmission, and utilisation. In credit provision, it is possible for lenders to make Type I and Type II errors. These types of errors are associated with whether banks decide to lend money to borrowers with low repayment capacity or risk missing out on potentially profitable lending. However, the recent US subprime loan crisis and previous financial crises (such as the Mexican, Argentinian, Chilean and Asian financial crises) show it is possible that banks can make both good and bad lending decisions. Does this mean that banks have lost their comparative advantages in leveraging information asymmetry? This Special Issue includes contribution in empirical methods in banking such risk and bank performance, capital regulation, bank competition and foreign bank entry, bank regulation on bank performance, and capital adequacy and deposit insurance.

The capital market spillover effect of product market advertising: Evidence from stock price synchronicity

We analyze whether product market advertising has a spillover effect on stock price synchronicity by transmitting firm-specific information to the capital market and attracting more investor attention. Using a sample of Chinese listed firms from 2009 to 2017, we find that firms with greater advertising expenditures have lower stock price synchronicity. The results are robust after we address endogeneity concerns. In accord with our hypothesis that product market advertising increases the amount of firm-level information capitalized into stock prices through the information channel, we find that the impact of advertising on synchronicity is more pronounced for firms with a higher degree of information asymmetry and firms in the consumer-product industry. Further tests show that product market advertising enhances the ability of current period returns to reflect future earnings, and thus rules out that the negative relationship between advertising and synchronicity is driven by noise trading. Our results imply that product market advertising plays an informative role and improves information efficiency in a capital market.

Contracting in Ocean Shipping Market Under Asymmetric Information

In this paper, we not only develop a Stackelberg game to capture the unique characteristics of the ocean freight transportation, but also employ a screening model to address the contracting issue between one carrier and one freight forwarder under asymmetric information. The freight forwarder faces random demand from multiple shippers. In our framework, the spot price is positively correlated with the shippers’ demand. We first derive the forwarder’s optimal strategy, and then formulate the carrier’s contract design problem under symmetric and asymmetric information. Subsequently, we fully characterize the equilibrium parameters for a two-part tariff contract. The numerical experiments conducted thereafter reveal that (i) under a higher correlation between the shippers’ demand and the spot price, the carrier prefers a lower purchase price and the forwarder orders more through a contract in the peak seasons; (ii) when the market demand is extremely volatile, the carrier should raise the purchase price and the forwarder should order more through a contract; and (iii) with a higher degree of information asymmetry, the carrier prefers a higher purchase price while the forwarder relies more on the spot market than the contract market.

News sentiment, credit spreads, and information asymmetry

This paper examines how the sentiment of firm-specific news affects CDS spreads conditional on the degree of information asymmetry. Using a large set of news releases, we document a strong negative relationship between the sentiment of firm-specific news and CDS spreads. More importantly, consistent with the role of public news in reducing information asymmetry, we find evidence that the relation between news sentiment and CDS spreads is stronger for firms with higher information asymmetry. Furthermore, the relation is stronger for news with negative sentiment and during the 2008 financial crisis. Our results are robust to alternative sentiment measures.

Customer concentration and stock price crash risk

We investigate the impact of customer concentration on stock price crash risk. Customer concentration may represent a source of significant cash flow and business risk for supplier firms or benefit supplier firms in terms of efficient product, inventory and supply chain management. Using a large sample of firms for the period 1977–2016, we find that corporate customer concentration is positively associated with stock price crash risk. We find, however, that government customer concentration is negatively associated with stock price crash risk. Further analyses demonstrate that our results are robust to potential endogeneity and reverse causality concerns. In the cross-sectional analyses, we find that the likelihood that a supplier firm with a concentrated customer base experiences higher crash risk is attenuated by lower switching cost and is accentuated when the degree of information asymmetry is high.

Asymmetry in food safety information – the case of the 2018 Listeriosis outbreak and low-income, urban consumers in Gauteng, South Africa

ABSTRACTThis study considered the efficiency with which food safety information is received and retained by low-income consumers in South Africa. Primary data from 110 low-income, urban, food consumers around Gauteng were collected and analysed with a willingness to pay (WTP) experiment and a proportional odds model. The study found that initially, 47% of the respondents claimed to know what Listeriosis is. Data validation, and a WTP experiment, however, suggest that there is social acceptability response bias. The proportional odds model further showed that education level is significant in explaining the level of food safety knowledge, but income is not. These results serve as an approximation of the degree of information asymmetry between low-income, urban food consumers and the South African government.

Supply competition under quality scores: Motivations, information sharing and credibility

Non-price attributes such as product quality, supplier’s reliability, and timely delivery can be more important than simply unit price for the buyers. Therefore, the form of supplier competition in which the buyer adjust the prices from the suppliers with the quality scores (QS) becomes more popular than that under price-only format, where the decision is made solely based on prices. That said, QS alters the competition between the suppliers in two ways. First, it changes the nature of price competition among the suppliers as the winner needs to offer the lowest QS-adjusted price (not necessarily the lowest price). Second, the specific value of QS for each supplier is only known to the buyer, which gives rise to the credibility issues from the buyer’s perspective. Analysing supply competition under QS, in this paper, we characterize the equilibrium prices and evaluate whether or not it is beneficial for the buyer to share QS information with the suppliers in a credible fashion. We identify two factors: (i) degree of homogeneity among the suppliers (as measured by relative QS between the suppliers) and (ii) degree of information asymmetry (as measured by the range of uncertainty for the relative QS). The buyer prefers not to share the relative QS with the suppliers if they are relatively similar to each other in terms of QS. This is because the suppliers engage in a more intensified price competition under information asymmetry compared to when they have access to exact value of the relative QS. However, the opposite holds true if the suppliers become more uncertain about their relative QS. Hence, in this case, the buyer finds sharing QS information with the suppliers beneficial for the sake of lowering equilibrium prices notwithstanding the cost of credible sharing.

Information asymmetry in CSR reporting: publicly-traded versus privately-held firms

PurposeThis paper aims to investigate the motivations behind the publication of corporate social responsibility (CSR) reports, and particularly the effect of information asymmetry between firms and their owners.Design/methodology/approachA natural experiment contrasting the CSR reporting of private vs public firms is used to test whether the degree of information asymmetry is a significant factor in the decision to publish CSR reports. Using a hand-collected sample of the 239 largest US private companies matched with publicly-traded firms, the effect of these inherently different information environments on CSR reporting is tested through logistic regression. Factors suggested by stakeholder and legitimacy theories are tested for their differential impact on private vs public firms’ decisions to publish a CSR report.FindingsResults indicate that private firms are less likely to publish a CSR report than similar public firms. Public firms also follow Global Reporting Initiative guidelines more frequently, consistent with signaling report quality to dispersed investors. A subsample of private companies facing greater information asymmetry is found to be similar to public firms in their reporting behavior, reinforcing the link between information asymmetry and CSR disclosure. Further analysis suggests that non-owner stakeholders play an important role in private companies’ CSR reporting decisions.Practical implicationsIn addition to accounting and governance scholars, the findings should interest private firm managers preparing for an initial public offering (IPO), as the evidence suggests that CSR reporting is used to communicate information to dispersed investors. The insight into reporting motivations should be useful to accountants engaged in CSR consultation and assurance.Social implicationsWith the growing attention paid to the CSR performance of firms, demonstrated by the growth in socially responsible investing, the study provides evidence that effective communication of CSR information to investors may play a key role in CSR-engaged firms’ disclosure strategies.Originality/valueTo the best of the author’s knowledge, this study is the first to analyze the CSR reporting decisions of a large sample of publicly-traded and privately-held firms. The results add to our understanding of what motivates firms to publish CSR reports, highlighting the importance of information asymmetry between the firm and its owners.

Bitcoin transactions, information asymmetry and trading volume

The underlying transparency of the Bitcoin blockchain allows transactions in the network to be tracked in near real-time. When someone transfers a large number of Bitcoins, the market receives this information and traders can adjust their expectations based on the new information. This paper investigates trading volume and its relation to asymmetric information around transfers on the Bitcoin blockchain. We collect data on 2132 large transactions on the Bitcoin blockchain between September 2018 and November 2019, where 500 or more Bitcoins were transferred. Using event study methodology, we identify significant positive abnormal trading volume for the 15-minute window before a large Bitcoin transaction as well as during and after the event. Using public information about Bitcoin addresses of cryptocurrency exchanges as proxies for information asymmetry, we find that transactions with high levels of information asymmetry negatively affect abnormal trading volume once the event becomes public knowledge, while some effects are even opposite for transactions with lower information asymmetry. The results show that blockchain transaction activity is a relevant aspect of Bitcoinns microstructure, as informed traders make use of the information in general and adjust their expectations based on the degree of information asymmetry.

Inter-Firm Connections, Alliance Formation and the Value Created by Alliances

We investigate the impact of inter-firm connections on alliances. We find that both professional connections, borne out of current employment ties and board interlocks along with social connections, borne out of past employment ties and educational ties, increase the likelihood of alliance formation. In addition, the market reacts more favorably to alliance announcements in the presence of such connections. Moreover, the positive valuation effects associated with connections increase with the degree of information asymmetry between the partner firms. Our findings are consistent with inter-firm connections creating value because it helps firms identify suitable alliance partners and facilitates the flow of information between partner firms, thereby reducing moral hazard concerns and the risk of ex-post opportunistic behavior.

LEVERAGE AND IPO PRICING: EVIDENCE FROM MALAYSIA

The pricing of IPOs is a challenging task among underwriters as they require resources from firms. Contrary to the non-financial information presented in a prospectus to set an offer rice, pre-IPO accounting information could arguably influence IPO offer price. This study aims to investigate the relationship between leverage and IPO offer price. A crosssectional Ordinary Least Square (OLS) regression was implemented to investigate the relationship between leverage and offer price based on a sample of 129 Malaysian IPOs issued between January 2009 and December 2018. As a result, it was proven that leverage was negatively related to offer prices. Accordingly, it was proposed in the findings that fit, which issued higher leverages prior to IPO listing, often posed high financial risks. Subsequently, underwriters and issuers set a lower price for IPOs to compensate for a higher degree of information asymmetry among retail investors. Among the implications of this study’s findings include investor concerns on accounting information, especially leverage upon determining IPO value and IPO investment.

News Sentiment and Credit Risk: Evidence from the CDS Market

This paper examines how the sentiment of firm-specific news affects CDS spreads conditional on the degree of information asymmetry. Using a large set of news releases, we document a strong negative relationship between the sentiment of firm-specific news and CDS spreads. More importantly, consistent with the role of public news in reducing information asymmetry, we find evidence that the relation between news sentiment and CDS spreads is stronger for firms with higher information asymmetry. Furthermore, the relation is stronger for news with negative sentiment and during the 2008 financial crisis. Our results are robust to alternative sentiment measures.

Shareholder litigation risk and real earnings management: a causal inference

PurposeThe authors study how shareholder litigation risk impacts a firm’s decision of real earnings management (REM). This paper aims to shed light on how shareholder litigation risk impacts REM. The authors further explore how the intensifying effect varies systematically conditioning on the degree of information asymmetry and the strength of internal corporate governance.Design/methodology/approachIn this study, the authors use the 1999 Ninth Circuit Court ruling as a quasi-experiment that reduces shareholder litigation risk to address endogeneity and establish a causal inference.FindingsThe difference-in-difference tests suggest lower shareholder litigation risk intensifies REM. In other words, higher litigation risk mitigates REM. Cross-sectional test results suggest the negative effect of decreased shareholder litigation is more pronounced when monitoring difficulty is higher, when information environment is more impoverished and when internal corporate governance is weaker. The negative effect is also stronger in firms with higher sensitivity to legal threats.Originality/valueProtection of investors’ interest is the focus of corporate governance. Designed as an important corporate governance mechanism, shareholder litigation enables investors to pursue legal actions to recover their losses in the event of corporate misbehaviors. However, whether shareholder litigation is an effective corporate governance tool and beneficial to shareholders and firms is not without controversy. The authors contribute to the debate by providing evidence that supports the argument that shareholder litigation threat significantly disciplines REM, a form of costlier earnings management technique and myopic investment behavior.

Asymmetric Effect of Media Tone on IPO Underpricing and Volatility

ABSTRACT Because of asymmetric information between issuing companies and investors, media coverage plays an important role in conveying information to investors during an initial public offering (IPO). The stock price is affected by a large amount of information released to the public through media coverage. Using a comprehensive sample of 1,075 IPOs on China’s stock market from 2009 to 2016, this paper conducts a textual analysis to determine the tone of media coverage and examines the relationship between media tone and IPO underpricing as well as post-IPO volatility. The empirical results show that media coverage during an IPO is significantly negatively associated with IPO underpricing, which confirms our hypothesis that the tone of media coverage reduces the degree of information asymmetry between investors and issuers, regardless of whether the tone is positive or negative. Consistent with prospect theory, investors are more sensitive to media coverage with a negative tone.

REMANUFACTURING WITH PATENTED TECHNIQUE ROYALTY UNDER ASYMMETRIC INFORMATION AND UNCERTAIN MARKETS

We study a dual-channel recycling closed-loop supply chain (CLSC) and investigate the royalty strategy involving cost-reducing technique for remanufacturing patented products. Facing information asymmetry and market uncertainty, we address the problem where the patent licensor (manufacturer) and licensee (remanufacturer) simultaneously compete in the sales market and the recycling market. We examine the optimal decisions of a decentralized CLSC (D-CLSC) with the manufacturer being the Stackelberg leader. Numerical examples are used to demonstrate how the patented technology (cost-reducing technique) affects the channel players’ behaviors and how to identify the optimal royalty fee. Based on the theoretical derivation and the numerical outcomes, we find that regardless of the CLSC structure (centralized or decentralized), the take-back prices and the total profits will rise with the increase of savings from the licensed technology. In the D-CLSC, (i) the expected profits of the manufacturer and the remanufacturer as well as the royalty fee will also rise with the savings from the licensed technology. (ii) In addition, the wholesale price, retail price, take-back prices, as well as the royalty fee will rise with the degree of information asymmetry. But the retailer’s expected profit will decline. (iii) Finally, the expected profit of the manufacturer will rise with the demand uncertainty and the return uncertainty. For the remanufacturer, this trend is not obvious. Our research provides guidance to resolve conflicts and intellectual property disputes between the original manufacturer and the remanufacturer of the patented product.