Extent Of Information Asymmetry Research Articles

Technology-Neutral Versus Technology-Specific Procurement

Abstract An imperfectly informed regulator needs to procure multiple units of some good (e.g., green energy, market liquidity, pollution reduction, land conservation) that can be produced with heterogeneous technologies at various costs. How should she optimally procure these units? Should she run technology-specific or technology-neutral auctions? Should she allow for partial separation across technologies? Should she instead post separate prices for each technology? What are the trade-offs involved? We find that one size does not fit all: the preferred instrument depends on the costs of the available technologies, their degree of substitutability, the extent of information asymmetry and the costs of public funds. We illustrate the use of our theory for policy analysis with an ex ante evaluation of Spain’s recent renewable auction.

Underwriter Networks, Information Asymmetry, and Seasoned Equity Offerings

Using various “centrality” measures from Social Network Analysis (SNA), we analyze, for the first time in the literature, how the location of a lead underwriter in its network of investment banks affects various aspects of seasoned equity offerings (SEOs). We hypothesize that investment banking networks perform an important economic role in the underwriting process for SEOs, namely, that of information dissemination, where the lead underwriter uses its investment banking network to disseminate information about the SEO firm to institutional investors. Consistent with the above information dissemination role, we show that SEOs with more central lead SEO underwriters are associated with a smaller extent of information asymmetry in the equity market. We then develop testable hypotheses based on the information dissemination role of underwriter networks for the relationship between SEO underwriter centrality and various SEO characteristics, which we test in our empirical analysis. Consistent with the above hypotheses, we find that SEOs with more central lead underwriters are associated with less negative announcement effects; smaller offer price revisions; smaller SEO discounts and underpricing; higher immediate post-SEO equity valuations; and greater post-SEO long-run stock returns. We also find that SEOs with more central lead underwriters are associated with greater institutional investor participation. Our instrumental variable (IV) analysis using the industry-average bargaining power of underwriters relative to issuers as the instrument show that the above results are causal. Consistent with greater value creation by more central lead underwriters, we find that more central lead underwriters receive greater compensation as a fraction of total SEO proceeds.

Privacy calculus or heuristic cues? The dual process of privacy decision making on Chinese social media

PurposeThe purpose of this paper is to explore the antecedents of self-disclosure intention on mobile social applications. This study integrates privacy calculus model and elaboration likelihood theory to reconcile the rational and heuristic views of privacy decision making.Design/methodology/approachUsing a “random dialing” sampling method, an empirical survey with 913 respondents was conducted. A series of regression models were employed to test the proposed relationships. Robust checks with sub-group analysis were conducted.FindingsSelf-disclosure intention develops along a dual route including the central route and the peripheral route. When the central route predominates, social media users form their attitudes toward self-disclosure based on a rational calculus of the privacy concern and perceived rewards. When the peripheral route predominates, users perform a more heuristic evaluation of relevant informational cues (information about privacy harms, the extent of information asymmetry between users and operators) and contextual cues (flow experience, privacy disclosure of friends). Peripheral cues moderate the relationships between central cues and self-disclosure intention.Originality/valueThis paper extends the Elaboration Likelihood Model by investigating the interaction between the central route and peripheral route. The results provide alternative explanations on the renowned “privacy paradox” phenomenon.

From IPO to M&A: Further Evidence

This study investigates the determinants of mergers and acquisitions (M&A) for firms in the five years following their initial public offerings (IPOs). Specifically, the authors focus on the role of venture capital (VC) and the effect of asymmetric information on the probability of post-IPO M&A. The results indicate that VC reputation positively influences the likelihood that an IPO firm will engage in acquisition. They also find that a high extent of information asymmetry faced by both the acquirer and the target affects the choice of payment in a post-IPO M&A. Furthermore, they find that IPO firms with higher underpricing and proceeds, larger insider ownership dilution, and backed with reputable venture capitalists are more likely to be frequent acquirers after the IPO. Overall, the authors’ new findings confirm that an IPO represents an opportunity for new issuers to become single and even frequent acquirers.

Migrant Networks and Job Search: Evidence from Thailand

Social networks may be important to internal migrants in developing countries where the extent of information asymmetry is sizable. This paper identifies network effects among rural-urban migrants in Thailand by exploiting heterogeneous response to rainfall shocks as exogenous variation affecting network size. While networks substantially reduce the duration of job search, in this case they tend to direct migrants toward agricultural (rather than nonagricultural) jobs because the local average treatment effects estimator identifies what happens to employment outcomes when the agricultural part of the network increases.

The Geography of Institutional Investors, Information Production, and Initial Public Offerings

We analyze how the geographical locations of institutions affect their investments in IPOs and various characteristics of the IPOs that they invest in. We argue that institutions geographically close to each other may influence each other’s investment decisions in IPOs. Further, they may also free-ride on each other's information when evaluating IPOs, resulting in IPOs dominated by geographically clustered institutions reflecting less accurate information signals compared to those dominated by geographically dispersed institutions. We test the implications of the above hypotheses using a measure of institutions' geographical dispersion. Our results can be summarized as follows. First, the equity holdings of institutions in IPOs are influenced more by the investments made by neighboring institutions than by those of distant institutions. An increase in the geographical dispersion of the institutions investing in an IPO is associated with higher IPO price revisions; higher IPO and immediate secondary market firm valuations; larger IPO initial returns; and greater long-run post-IPO stock returns. Further, consistent with an information channel driving the above results, we find that the extent of information asymmetry facing an IPO firm is decreasing in the geographical dispersion of institutions investing in its IPO. Finally, the predictive power of institutional trading post-IPO for subsequent long-run stock returns and earnings surprises for the first fiscal-year end after the IPO is greater for geographically isolated institutions compared to those that are geographically clustered.

R&D Investment and Market Reactions in Non-crisis and Crisis Periods: Evidence from Taiwan

This study examines market reactions to firms with different level of R&D expenditure. In particular, we investigate whether R&D investment in an uncertain environment, such as during the global financial crisis of 2008, will aggravate the level of information asymmetry and increase the likelihood of undervaluation on R&D stocks. We use a sample of Taiwanese firms and classify the sample into four portfolios: no R&D, low R&D, middle R&D and high R&D firms, and estimate abnormal returns using the Fama and French three factor and Carhart four factor models. We find that the no R&D portfolio has the highest positive and significant abnormal returns in the non-crisis period (2000-2007), while the high R&D portfolio has the highest abnormal return in crisis period (2008-2011). Our multivariate analysis provides supporting evidence that high R&D firms have a greater extent of information asymmetry than no R&D firms during the crisis period, while no R&D firms bear a high risk of low growth potential in non-crisis period. Similar results are obtained either by equal-weighted or value-weighted portfolio returns. Recent studies propose that investors may misprice high-tech firms. Our results provide international evidence that investors react differently to no R&D and R&D intensive firms, and R&D investment in crisis period will aggravate information asymmetry and the extent to which investors underestimate the value of R&D stocks.

A Proposed Framework to Reduce Asymmetric Information in Equity Offerings

Abstract The security offering literature shows that firms offering their shares for sale to the public generally manage their earnings upwards around the offering to raise investor demand for the firm’s shares and increase their sale price. In addition, the literature demonstrates that earnings management around the offering increases the information asymmetry between the issuers and outside investors, thereby increasing the issue flotation costs. Markedly increased flotation costs imply, inter alia, a reduced demand for, and pricing of, the new shares offered – the opposite result of that sought by the issuing management. To date, mechanisms to prevent issuing firms from managing earnings opportunistically are non-existent. I address this current gap in the literature by proposing a disclosure-based framework for issuing firms aimed at reducing the extent of information asymmetry between them, outside investors and underwriters. Specifically, I present a mechanism where firms add a voluntary “honest disclosure” section in their issue prospectuses, in which they provide information that reduces uncertainty about their financial reports. I demonstrate that such voluntary disclosures by firms create a reality that encourages truthful reporting around the offering and results in a more effective capital market. The proposed framework does not require a change in current institutional mechanisms. Furthermore, as an integral part of the prospectus, the SEC will scrutinize the disclosure. Last but not least, the new section should not add significant cost to the issuer.

Government ownership, informed trading, and private information

We investigate the nature and extent of information asymmetry among traders in companies with government ownership. Consistent with a less transparent information environment, we find relatively less informed trading in the shares of firms with government presence, and specifically, fewer informed trades related to the skilled analysis of public information. At the same time, we also find that firms with government presence have a significantly higher proportion of informed trading that arises from explicitly private information, consistent with the literature on the self-serving influence of government stakeholders not necessarily committed to maximizing firm value.

Migrant Networks and Job Search: Evidence from Thailand

Social networks may be important to internal migrants in developing countries where the extent of information asymmetry is sizeable. This paper identifies network effects among rural-urban migrants in Thailand by exploiting heterogeneous response to rainfall shocks as exogenous variation affecting network size. While networks substantially reduce the duration of job search, in this case they tend to direct migrants towards agricultural (rather than non-agricultural) jobs because the local average treatment effects estimator identifies what happens to employment outcomes when the agricultural part of the network increases.

The political economy of incentive regulation: Theory and evidence from US states

The determinants of incentive regulation are an important issue in economics. More powerful rules relax allocative distortions at the cost of lower rent extraction. Hence, they should be found where the reformer is more concerned with stimulating investments by granting higher expected profits, and where rent extraction is less necessary since the extent of information asymmetries is more limited. This prediction is consistent with US power market data. During the 1990s, performance based contracts were signed by firms operating in states where generation costs were historically higher than those characterizing neighboring markets and the regulator had stronger incentives to exert information-gathering effort because elected instead of being appointed.

Price Discovery Function of Large Trades and the Cross-Section of Expected Stock Returns

The price discovery function measures the private information revealed in prices through trades. As informed traders prefer large trades, the price discovery function of large trades (VECIN), estimated from a vector error correction model of cointegrated price series of large and small trades, measures the extent of information asymmetry between traders. VECIN has a strong impact on future stock returns, and its power to predict stock returns is stronger than any of the well-known return predictors we have considered. A VECIN spread portfolio of NYSE/Amex stocks that goes long in the top VECIN quintile and short in the bottom VECIN quintile earns a Fama-French (1993) risk-adjusted return of 0.99% per month. Adding the VECIN spread portfolio to the Fama-French three factors triples the Sharpe ratio of the ex-post tangency portfolio from 0.24 to 0.71. Further tests suggest that mispricing cannot fully explain the strong pricing impact of VECIN.

Management Quality and Equity Issue Characteristics: A Comparison of SEOs and IPOs

We use a unique sample of hand-collected data on the management quality of firms making SEOs or IPOs to analyze the relationship between the management quality of a firm and its SEO characteristics, and to compare the effect of management quality on equity issue characteristics in SEOs and IPOs. We hypothesize that higher quality managers are more credible to outsiders, thereby reducing the information asymmetry facing their firm in the equity market and outsiders’ information production costs about the firm. Thus, equity issues of firms with higher management quality will be associated with more reputable underwriters, smaller underwriting spreads and other expenses, and smaller discounts (for SEOs). Further, since better managers are able to select better (larger NPV for a given scale) projects, higher management quality will also be associated with larger offer sizes. Finally, since we expect SEO firms to suffer from a smaller extent of information asymmetry compared to IPO firms, the above effects will be smaller for SEO firms compared to IPO firms. Our empirical results support the above hypotheses. Our direct tests of the relationship between management quality and information asymmetry, and our comparison of information asymmetry in SEOs versus IPOs, provide further support for the above hypotheses.

Information Revelation Along the Supply Chain: Seasoned Stock Offering Implications for Issuers with Large Customers

We examine how the adverse selection faced by customers affects the market's response to SEO announcements by their suppliers. We find that firms with a large customer experience a more negative SEO announcement return than those without a large customer. Large customers also experience a negative stock price response around their suppliers' SEO announcements. The announcement returns of SEO firms and their customers are lower when the extent of information asymmetry between the issuing firm and customer is more severe, when the relationship breakup cost is high, and when the post-SEO relationship is more likely to weaken. We also find that after the SEO, the length of the relationship, the investment in relationship specific assets, and the reliance on the large customer deteriorate significantly, further supporting the view that SEO announcements by firms with a large customer convey negative information about the value of the customer-supplier relationship.

Government Ownership, Informed Trading, and Private Information

We investigate the nature and extent of information asymmetry among traders in companies with government ownership. Consistent with greater exposure and public scrutiny, we find relatively less informed trading related to the skilled analysis of public information in the shares of firms with government presence, resulting in lower overall information asymmetry. At the same time, we also find that firms with government presence have a significantly higher proportion of information asymmetry arising from explicitly private information, consistent with the literature on the self-serving influence of government stakeholders not necessarily committed to maximizing firm value.

Policy burdens, firm performance, and management turnover

Abstract Lin, Cai, and Li [Lin, Y., Cai, F., Li, Z., 1998. Competition, policy burdens, and state-owned enterprise reform. American Economic Review 88, 422–327] argue that under information asymmetry, SOE managers can use state-imposed policy burdens as excuses of poor performance and make the State accountable for it. The argument implies that turnover–performance sensitivity of SOEs decreases as policy burdens increase and that such impact depends on the extent of information asymmetry. Accordingly, this paper empirically explores how policy burdens affect top management turnover of Chinese listed firms between 2000 and 2005. We find that high surplus labor significantly reduces the sensitivity of chairman turnover to performance for state-controlled firms, while private firms do not exhibit such a pattern. Furthermore, our results show that high surplus labor reduces the turnover–performance sensitivity more for firms with greater information asymmetry. Overall, we find strong evidence supporting the implications of Lin, Cai, and Li [Lin, Y., Cai, F., Li, Z., 1998. Competition, policy burdens, and state-owned enterprise reform. American Economic Review 88, 422–327]. In addition, we find that chairman turnover of Chinese firms is sensitive to different performance measures for state-controlled firms and private firms.

Institutional Trading, Information Production, and Corporate Spin-Offs

Using a large sample of proprietary transaction-level institutional trading data, we empirically analyze, for the first time in the literature, the role of institutional investors in corporate spin-offs. In the first part of the paper, we study the imbalance in post-spin-off institutional trading between parent and subsidiary, and analyze this imbalance to test three different hypotheses regarding institutional investors' role in spin-offs: information production, pure play, and risk management. In the second part of the paper, we examine the information production role of institutional investors further by analyzing the predictability of institutional trading around corporate spin-offs for the short-term and the long-term stock returns following spin-offs. In the third part of the paper, we study the pattern and profitability of institutional trading following spin-offs. Our empirical results can be summarized as follows. First, there is significant imbalance in post-spin-off institutional trading between parents and subsidiaries; this imbalance increases corresponding to the difference in the extent of information asymmetry characterizing the two entities, beta risk, and long-term growth prospects. Second, institutional trading in the combined firm two months prior to the spin-off has significant predictive power for the announcement effect of a spin-off. Third, institutional trading in the subsidiary immediately after spin-off completion also has predictive power for its subsequent long-term stock returns; this predictive power is greater when the subsidiary's size constitutes only a smaller fraction of the combined firm's size. Fourth, the predictive power of institutional trading is weaker for the parent firm's long-term returns; further, unlike in the case of the subsidiary, institutional investors start exploiting their private information after the spin-off announcement, but before the spin-off is completed. Finally, institutional investors are able to realize superior profits by trading in the equity of the subsidiary in the first quarter after the spin-off. While our results provide some support for all three hypotheses regarding the role of institutional investors in corporate spin-offs, they provide particularly strong support for the information production hypothesis.

Advertising or Price? The Efficacy of Quality Informational Cues in Online Sponsored Search Markets

The digitization of commerce has caused fundamental changes in consumer information search and use. With an increasing number of consumers using search engines as an integral component of their online purchase process, online sponsored search markets, such as those provided by Google and Yahoo!, have emerged as a dominant customer acquisition mechanism for sellers. Given the extent of information asymmetry in online markets, consumers rely on a number of informational cues or signals to infer the quality of sellers - advertising and price being the two most important among them. While the importance of advertising and price as signals of quality has been well established in traditional markets, online sponsored search markets have a number of unique characteristics that differentiate them from traditional settings and raise unanswered questions about the efficacy of different informational cues for consumers' search and transaction behaviors. Using a lab experiment, we examine how the knowledge of firms' relative advertising expenditures and prices affect consumers' search and purchase decisions. Contrary to earlier findings of the dominance of price signals in traditional markets, we find that firms' relative advertising expenditures serve as a stronger signal of quality in online sponsored search markets - a result attributable to the directional nature of these markets. We also find that the risk attitude of consumers has a significant impact on consumer beliefs and market outcomes. We discuss the implications of our findings for sellers and consumers using sponsored search markets, as well as for search intermediaries.

The Endogeneity of Information Asymmetry and Corporate Financing Decisions

We model that firms endogenize the extent of information asymmetry by choosing the optimal level of direct communications with capital markets. We find that leaner firms with less slack (lower cash balance and higher long-term leverage) tend to have greater formal communications. We show that high-growth and low-cash firms engage in more communications with capital markets, and actually attain a lower level of information asymmetry than low-growth and high-cash firms. When applied to seasoned equity offerings, firms with higher scores of communications are more likely to issue SEOs and incur lower issuing costs. We further demonstrate that the previously observed negative market reaction to SEO announcements is entirely attributed to the low-communication firms; high-communication SEO firms experience no significant adverse market reaction.

Management Quality, Financial Policies, and Asymmetric Information

We develop measures of the management quality of firms and make use of a unique sample of hand-collected data to examine the relationship between the reputation and quality of a firm's management and its financial policies, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thus reducing the information asymmetry facing their firm in the equity market. Given this, firms with better and more reputable managements will have more access to the equity market, so that we expect lower leverage ratios for these firms. In addition, they will have less need to signal using dividends, so that they will have lower dividend payout ratios. Further, since better managers are likely to select better projects (having a larger NPV for any given scale) and implement them more ably, higher management quality will also be associated with higher levels of investment and R&D expenditures. We present evidence consistent with the above hypotheses. Our direct tests of the relationship between management quality and asymmetric information also indicate that higher management quality leads to a reduction in the extent of information asymmetry facing a firm in the equity market.