Asymmetric Information Environment Research Articles

CEO Political Ideology and Voluntary Forward-Looking Disclosure

Abstract This study investigates whether the management earnings forecasts of Republican and Democratic CEOs differ due to systematic differences in their information disclosure preferences. We find that Republican CEOs prefer a less asymmetric information environment than Democrat CEOs, and thus make more frequent, timelier, and more accurate disclosures than Democrat CEOs. Results using the propensity score matched sample and difference-in-differences analysis show that our results are unlikely to be driven by potential endogeneity. Our results are robust to controlling for various CEO characteristics and are stronger for firms with higher levels of institutional ownership and litigation risk.

Dynamic association of stock market volatility, foreign portfolio investment and macroeconomic indicators by taking the impact of structural breaks

In an asymmetric information environment, investors diversify their investments to minimize risk and maximize their wealth. Such diversification ranges from one market to another market and from one country to another country. Investors prefer foreign portfolio investment over foreign direct investment because of the economy's turmoil, changes in macroeconomic indicators, and market liberation. This study analyzes the dynamic relationship among stock market volatility, foreign portfolio investment, and macroeconomic indicators (foreign exchange rate, interest rate, and Gross Domestic Product) using the dynamic long-run Auto-regressive Distributed Lag (ARDL) model concerning the Pakistan environment. This study also considers the impact of multiple structural breaks, representing variables' endogenous and exogenous shocks. The secondary data is used from Oct. 01, 2009, to Sept. 30, 2019, with monthly frequency. The results indicate a co-integration between SMV, FPI, FXR, IR, and GDP. In short-run analyses, the error correction term is statistically significant, while in the long run, the SMV, FPI, and FXR are not impacted. As no evidence of volatility has been found between SMV and FPI, unidirectional or bi-directional policies can be devised to further attract the new FPI for strengthening the foreign reserves, the balance of payments, and other macroeconomic variables. Additionally, investors should update their knowledge based on considering the endogenous and exogenous shocks on the SMV.

Contract design for a closed-loop supply chain considering information asymmetry of remanufacturing process innovation

PurposeAsymmetric cost information exists between a supplier and a manufacturer regarding the manufacturer's process innovation for remanufacturing (PIR), which may hurt the supplier's profit. The authors therefore seek to develop a menu of nonlinear pricing contracts for channel information sharing.Design/methodology/approachBased on principal–agent theory, the supplier, acting as a Stackelberg leader, designs a menu of nonlinear pricing contracts to impel the manufacturer to disclose its private cost information on PIR (i.e. PIR efficiency). In addition, the authors compare the equilibrium outcomes under asymmetric and symmetric information to examine the effects of asymmetric PIR information on the production policies and profits of the supplier and the manufacturer.FindingsThe proposed contract menu encourages th4e manufacturer to spontaneously share PIR efficiency information with the supplier. Asymmetric PIR information may distort the output of new products upward or downward, but the output of remanufactured products may only be distorted downward. In addition, the manufacturer with high PIR efficiency gains information rent, and interestingly, the increase in the probability of low PIR efficiency amplifies its information rent. Finally, an asymmetric information environment may increase the threshold for the manufacturer to enter remanufacturing.Originality/valueThe authors probe the issue of the supplier's contract design by jointly considering remanufacturing, process innovation and information asymmetry. The paper expands the influencing mechanism of process innovation information in the remanufacturing field. The authors also observe new results that may offer guidance to decision makers.

Strategies in supply chain competition: A game theoretic approach

In competitive markets for substitutable products it is essential for firms to develop appropriate strategies to sustain competition. This research focuses on the strategies of quality production, product pricing and marketing efforts. The competition between substitutable products is modelled by considering two competing supply chains, each with a manufacturer and a retailer. A supply chain game is developed in which the two manufacturers move first and retailers move next. The horizontal competition between the two manufacturers is modelled as a simultaneous move game, similar is the case with the retailers. The vertical competition between the manufacturer and the retailer in each supply chain is modelled as a manufacturer led Stackelberg game in which the manufacturer optimally decides the quality level of production. The retailer responds by optimally deciding the retail price of the product and the extent of marketing efforts to be undertaken. The findings of this study indicate that the quality level of the product increases with competition intensity among the supply chains. Comparisons with the centralized setting and monopolistic markets are also performed. Finally the competition between supply chains in an environment of asymmetric information about the manufacturer’s cost for quality production is made.

Is information asymmetry always detrimental to firm value? findings from the restaurant industry

The purpose of the current study was to investigate the impact of information asymmetry on firm value in the restaurant industry. Secondary financial data were collected for U.S.-based publicly traded restaurant firms. In addition, fixed-effects panel regression analyses were performed to examine the proposed relationship. The results of the current study showed that in the restaurant industry, not only high information asymmetry but also an overly transparent information environment can be detrimental to firm value, as evidenced by an inverted U-shaped relationship between asymmetric information and firm value in the restaurant industry. This result differs from the findings of previous studies, which mostly support the negative impact of asymmetric information on firm value. Furthermore, the current study showed that firm age and financial leverage serve as moderators of the curvilinear relationship between the asymmetric information environment and firm value in the restaurant industry.

An apologia for using journal prestige in academic employment decisions: An asymmetric information perspective

Using journal prestige to gauge the quality of research articles has been criticized by some scholars in the academic research assessment literature. These critics argue that citation-based metrics, while imperfect, are better suited to assessing article quality. This paper counters these beliefs by describing specific research assessment contexts where journal prestige is likely to be the superior mode of assessment. To do so, academic employment decisions are framed as asymmetric information problems wherein the research evaluating body has less information about a scholar’s true abilities than the scholar. Signaling Theory therefore offers a logical explanation for using journal prestige as a measure of research quality during academic contract renewals and promotions wherein recent research accomplishments are of preeminent importance. While journal prestige is an imperfect measure of article quality (as are citation counts), understanding it as a credible signal in an asymmetric information environment proffers a fundamental explanation for its applicability in academic assessment decisions.

Dividend and investment decisions in asymmetric information environments: evidence from the restaurant industry

PurposeThis study aims to examine how information asymmetry, which refers to an information gap between a firm’s management and its investors regarding the firm’s true value, influences firms’ dividend and investment decisions in the restaurant industry. This study also investigated the moderating role of a firm’s level of franchising in the relationship between information asymmetry and these behaviors of restaurant firms.Design/methodology/approachThis study used generalized method of moments panel regression analyses. Principal component analysis was also used to create a composite index of information symmetry.FindingsThis study demonstrated that in asymmetric information environments, restaurant managers tend to reduce dividend payments. In addition, this study showed that information asymmetry leads to restaurant managers’ investment inefficiency. However, the investment inefficiency of the restaurant industry was found to decrease as restaurant firms’ level of franchising increases.Practical implicationsFirms’ dividends and investment decisions are of great interest to investors because these decisions heavily influence investors’ wealth-maximization goals. By shedding light on the previously unrecognized determinants of dividend and investment behaviors in the restaurant industry, this study helps individual investors to make informed investing decisions.Originality/valueConflicting arguments can be made regarding the impact of asymmetric information environments on the dividend and investment behaviors of restaurant firms. This study aimed to verify these as-yet unclear relationships in the restaurant industry.

Efficient bilateral trade via two-stage mechanisms: Comparison between one-sided and two-sided asymmetric information environments

This paper first considers a bilateral-trade model with one-sided asymmetric information in which one agent (seller) initially owns an indivisible object and is fully informed of its value, while the other agent (buyer) intends to obtain the object whose value is unknown to himself. As no mechanisms can generally result in efficient, voluntary bilateral trades (Jehiel and Pauzner, 2006), we aim to overturn this impossibility result by employing two-stage mechanisms (Mezzetti, 2004) in which first, the outcome (e.g., allocation of the goods) is determined, then the agents observe their own outcome-decision payoffs, and finally, transfers are made. We show that the generalized two-stage Groves mechanism and the shoot-the-liar mechanism both induce efficient, voluntary bilateral trades. We next consider a two-sided asymmetric information setup in which both parties have private information. We show by means of a stylized example that the shoot-the-liar mechanism “sometimes” induces an efficient, voluntary trade, while the generalized two-stage Grove mechanism never induces it.

Packet Loss Measurement Based on Sampled Flow

This paper is devoted to further strengthening, in the current asymmetric information environment, the informed level of operators about network performance. Specifically, in view of the burst and perishability of a packet loss event, to better meet the real-time requirements of current high-speed backbone performance monitoring, a model for Packet Loss Measurement at the access network boundary Based on Sampled Flow (PLMBSF) is presented in this paper under the premise of both cost and real-time. The model overcomes problems such as the inability of previous estimation to distinguish between packet losses before and after the monitoring point, deployment difficulties and cooperative operation consistency. Drawing support from the Mathis equation and regression analysis, the measurement for packet losses before and after the monitoring point can be realized when using only the sampled flows generated by the access network boundary equipment. The comparison results with the trace-based passive packet loss measurement show that although the proposed model is easily affected by factors such as flow length, loss rate, sampling rate, the overall accuracy is still within the acceptable range. In addition, the proposed model PLMBSF, compared with the trace-based loss measurement is only different in the input data granularity. Therefore, PLMBSF and its advantages are also applicable to aggregated traffic.

Making political connections work better: Information asymmetry and the development of private firms in China

AbstractResearch question/issuePrevious studies have documented the benefits for firms of building political connections, yet there is a gap in the literature on the information transmission effect of political connections. Our study examines the effect of political connections in a highly asymmetric information environment—private firms in China.Research findings/insightsUsing quarterly data on listed private firms in China from 2004 to 2017, we find that political connections ensure such firms have access to reliable political information, which mitigates the risks of policy uncertainty. Further, firms connected to the government are better able to mitigate the negative effects of policy uncertainty than those connected to the legislature, while firms tied to high‐level authorities are better able to do so than those tied to lower‐level ones. Specifically, political connections are more effective in lower‐marketized and peripheral regions, where information asymmetry is higher.Theoretical/academic implicationsOur study highlights the importance of political connections in mitigating the negative relationship between policy uncertainty and corporate investment via the information transmission channel. Specifically, officials can more efficiently mitigate policy uncertainty than delegates, and high‐level authorities are more effective than lower‐level officials.Practitioner/policy implicationsWe argue that building political connections helps private firms offset the negative effects of policy uncertainty. Our findings provide useful insights for understanding the impacts of Regulation No. 18 of October 2013, which limits the employment of current and retired officials in private firms.

Vendor-managed inventory supply chain coordination based on commitment-penalty contracts with bilateral asymmetric information

ABSTRACT Vendor Managed Inventory (VMI) is adopted to improve the efficiency of overall supply chain. Research shows that asymmetric information might cause supply chain inefficiency. This study looks at how VMI supply chain coordination can be achieved in an asymmetric information environment. We propose a commitment penalty contract to improve the performance of a VMI supply chain where the manufacturer holds private production cost information and the retailer holds private demand information. The replenishment quantity and contract under symmetric information and bilateral asymmetric information are solved respectively. We find that the commitment penalty contract may reveal the private information of the manufacturer and the retailer can coordinate the supply chain under the asymmetric information of bilateral information. We present numerical examples to illustrate the effectiveness of the contract and develop managerial guidelines.

Asymmetric information and personal affiliations in brokered housing transactions

AbstractThis research provides evidence on the role of information asymmetry and personal affiliations in housing transactions using a novel dataset that allows observation of detailed information about the property, broker, and seller. Sellers holding a real estate license are found to obtain about 1.6% (or $3,200) more for their properties than unlicensed sellers, and sellers personally affiliated to a real estate licensee (e.g., spouses, siblings, parents) also obtain a premium of about the same size, all else equal. There is evidence from appraisal training that knowledge of property valuation further increases the price disparities, while informative public property records reduce price disparities. Agents and personal affiliates of agents appear to use information advantages to time the market and capture capital gains. These new findings provide insights into the behaviors of market participants in asymmetric information environments.

Asymmetric Information and Affiliations in Brokered Housing Transactions

This research provides evidence on the role of information asymmetry and personal affiliations in housing transactions using a novel dataset that allows observation of detailed information about the property, broker, and seller. Sellers holding a real estate license are found to obtain about 1.6 percent (or $3,200) more for their properties than unlicensed sellers, and sellers personally affiliated to a real estate licensee (e.g., spouses, siblings, parents) also obtain a premium of about the same size, all else equal. There is evidence from appraisal training that knowledge of property valuation further increases the price disparities, while informative public property records reduce price disparities. Agents and personal affiliates appear to use information advantages to time the market and capture capital gains. These new findings provide insights into the behaviors of market participants in asymmetric information environments.

Trust and IPO underpricing

This study examines the impact of trust on initial public offering (IPO) underpricing using a large sample of IPO firms in China. We find that firms in regions of high social trust have lower underpricing, consistent with the notion that IPO firms in low-trust regions have to offer greater underpricing to secure participation. This result is robust to a battery of sensitivity tests and after controlling for endogeneity using instrumental variables. We also find that the negative relation between social trust and underpricing is more prominent for small and growth firms, and firms in high-tech industries, consistent with trust playing a more important role in asymmetric information environments. This relation is less pronounced for firms with high insider ownership and political connections, suggesting that investors rely less on trust in these cases; it is less salient when firms are in regions with high quality legal institutions and high average education levels, consistent with trust being a substitute for formal institutions.

Measuring quality for use in incentive schemes: The case of “shrinkage” estimators

Researchers commonly “shrink” raw quality measures based on statistical criteria. This paper studies when and how this transformation's statistical properties would confer economic benefits to a utility‐maximizing decision‐maker across common asymmetric information environments. I develop the results for an application measuring teacher quality. The presence of a systematic relationship between teacher quality and class size could cause the data transformation to do either worse or better than the untransformed data. I use data from Los Angeles to confirm the presence of such a relationship and show that the simpler raw measure would outperform the one most commonly used in teacher incentive schemes.

Measuring quality for use in incentive schemes: The case of “shrinkage” estimators

Researchers commonly “shrink” raw quality measures based on statistical criteria. This paper studies when and how this transformation's statistical properties would confer economic benefits to a utility‐maximizing decision‐maker across common asymmetric information environments. I develop the results for an application measuring teacher quality. The presence of a systematic relationship between teacher quality and class size could cause the data transformation to do either worse or better than the untransformed data. I use data from Los Angeles to confirm the presence of such a relationship and show that the simpler raw measure would outperform the one most commonly used in teacher incentive schemes. Economics of education empirical contracts teacher incentive schemes teacher quality D81 I21 I28 J01

The Effect of Local Subsidy Competition on Excess Capacity in China: Empirical Study Based on Propensity Score Matching-DID

Local governments subsidize enterprises directly or indirectly by various means, which may lead to the over-investment behaviors of enterprises and then induce serious overcapacity problem. How do local government behaviors affect the production and capacity decisions of the enterprises? Previous studies primarily focus on the impacts of institutional factors on overcapacity but ignore the problem of information asymmetry in the market. Moreover, only a few researchers have done the empirical studies on this topic. This paper combines Chinese unique institutional background and asymmetric information environment to build a two-period dynamic game model with incomplete information, so as to explore a new mechanism of the impact of local subsidy competition on overcapacity in China. We find that the excess capacity ratio induced by local subsidy competition is larger than the normal excess capacity ratio when the market information is asymmetric. And the more subsidies an enterprise receives, the more likely the industry has overcapacity. Based on the micro-data of enterprises from 2001 to 2007 in China, this paper uses the propensity score matching difference-in-difference method to do the empirical test. The results show that: for those enterprises who have received the subsidies, the overcapacity rate after the subsidies rises by about 1% to 3%. And compared with those non-subsidized enterprises, the overcapacity rate of subsidized enterprises rises by about 2% to 12%, which indicates that local subsidies could significantly inhibit the capacity utilization rate of enterprises and exacerbate the overcapacity. This paper provides not only empirical evidence for the impact of local subsidies on overcapacity, but also some policy implications for the governments to deal with overcapacity. Firstly, the interest distribution mechanism between central and local governments should be rationalized, such as improving Chinese financial management system, which could be an institutional method used to regulate the behavior of local governments. Secondly, it is necessary to strictly formulate and implement the local subsidy rules and the local administrative accountability system, so as to strictly inhibit the local irregular and excessive subsidies. Thirdly, an effective adjustment mechanism for the local subsidies ought to be established to adjust the local subsidy structure actively and exert the overall benefits of local subsidies. The marginal contributions of this paper are as follows: firstly, on the basis of Lin Yifu’s wave phenomenon”, this paper pays attention to the subsidy competition of local investments. We construct a dynamic game model with incomplete information to explore the new mechanism of how local subsidy competition affects the overcapacity. Moreover, we take the lead in using the propensity score matching difference-in-difference method to empirically test the impact of local subsidy competition on overcapacity, and focus on the changes in capacity utilization of enterprises before and after local subsidies. It not only can effectively alleviate the endogenous problem, but also provides some empirical and technical reference for follow-up research.

Queuing Up for Justice: Prosecutor Elections and Case Backlogs

We analyze the impact of prosecutor elections on case backlogs. Previous evidence has shown that re-election pressures result in more cases going to trial. Since trials require time and resources, one can expect an effect on the queue. Two competing theories are developed: one of signaling quality in an asymmetric information environment and one of effort exertion, each of which can explain increased trials before election, but differ in their predictions regarding the impact on backlogs. A district-level, panel data set of caseload flows in North Carolina is analyzed. We present evidence that elections, and specifically contested re-elections, are associated with a decrease in the number of cases handled.

Measuring Quality for Use in Incentive Schemes: The Case of 'Shrinkage' Estimators

Researchers commonly “shrink” raw quality measures based on statistical criteria. This paper studies when and how this transformation’s statistical properties would confer economic benefits to a utility-maximizing decisionmaker across common asymmetric information environments. I develop the results for an application measuring teacher quality. The presence of a systematic relationship between teacher quality and class size could cause the data transformation to do either worse or better than the untransformed data. I use data from Los Angeles to confirm the presence of such a relationship and show that the simpler raw measure would outperform the one most commonly used in teacher incentive schemes.

CSR Selection after the Crises about Harm to Products: Business CSR or Philanthropic CSR

Many corporations implement CSR activities after the crises about harm to products to restore damaged firm images. However, different CSR selections may have completely different effects. Drawing on the conflict of instrumental and normative views of stakeholder theory, this paper introduces both cognitive dissonance theory and attribution theory to build a comprehensive theoretical model to reconcile the conflict between the two views. Experimental results show that in current environment of limited trust and asymmetric information in China, consumer suspicion plays an intermediary role in CSR perception and the change in purchase intentions. The interactive effect of business CSR and philanthropic CSR affects the changes in consumer purchase intentions through consumer suspicion. Moreover, only when the perceived level of business practice CSR is high, philanthropic CSR plays a positive role, otherwise, more input in philanthropic CSR is easy to arouse consumer suspicion. Therefore, in practice, provided adequate resources, both business practice CSR and philanthropic CSR should be kept at a high level. Provided inadequate resources, corporations should give priority to select the strategy of high-level business CSR and low-level philanthropic CSR. This paper clears consumer psychological mechanism of interpretation and feedback to CSR practice, thereby helping corporations to break through the dilemma of the implementation of CSR restoration strategies after the crises about harm to products.