Information Environment Of Firms Research Articles

The effect of modern information technology on corporate payout policy. Evidence from EDGAR implementation

PurposeThis study uses the Electronic Data Gathering Analysis and Retrieval (EDGAR) implementation as an information shock to examine its effect on corporate payout policy.Design/methodology/approachThis study uses a generalized difference-in-differences approach to assess the causal impact of EDGAR implementation on the US publicly traded firms’ payout policy for a period from 1990 to 1999. The approach captures the difference between changes in the dividend policy of firms subjected to EDGAR implementation (treated firms) and those not subjected to the implementation (control firms).FindingsFirms increase payout ratios and the likelihood of paying dividends after the implementation of EDGAR. Notably, these effects are more pronounced in firms characterized by high agency problems ex-ante.Practical implicationsPolicies designed to improve a firm’s information environment may yield divergent effects on corporate payout policy. Consequently, in countries aiming to promote cash dividends, policymakers seeking to enhance the firm information environment should carefully consider initiatives that will improve minority investors’ access to corporate information.Originality/valueThe findings contribute to the real effects of EDGAR implementation on firm policies, addressing the ambiguity surrounding the economic consequences of EDGAR adoption. This paper also contributes to the existing literature on the impact of information shock on corporate payouts. The findings emphasize the multifaceted influence of information shock on corporate payouts.

Investing while lending: Do index funds improve managerial information disclosure?

Securities lending activities have become pervasive among index funds in recent decades, yet its impact on information disclosure remains unclear. In this paper, we jointly investigate the information disclosure impact of both investing and lending activities of index funds, using a sample of the U.S. firms for 2002–2017. On the one hand, we document that securities lending deteriorates the information environment of public firms. On the other, index fund holdings are associated with greater information transparency and less bad news hoarding by firm managers, after controlling for the opposing effects from securities lending. This finding survives a battery of robustness tests and is more pronounced in a small sample using the Russell 1000/2000 index reconstitution as a source of plausibly exogenous variation in index fund holdings. We also document a negative association between index ownership and abnormal trading activities around stock price crash weeks. Our findings support the view that regardless of their pervasive securities lending engagement and passive investing strategies, index funds impose an overall favourable impact on information environment of public firms.

The Impact of M&A Delistings on the Information Environment of Industry Peer Firms

ABSTRACT This study documents that M&A delistings are associated with a deterioration in the quality of analysts’ information environment for industry peer firms, measured by an increase in analysts’ absolute forecast errors and dispersion. This effect persists for six quarters and is larger when the delisting target firm contributes relatively more to the industry information environment. Further, we find that, among analysts forecasting earnings for an industry peer firm, those who also followed the delisted target firm in the pre-M&A period experience a larger increase in their absolute forecast errors. A comparison based on public versus private target firms also suggests that the loss of target firms’ public disclosures plays a role in the deterioration in the quality of analysts’ information environment. In additional analyses, we find evidence consistent with this effect resulting from a deterioration in analysts’ ability to exploit across-firm information complementarities. JEL Classifications: G14; G18; G34; M40.

Does the gender composition of local governments matter for firms’ information environment? Evidence from China

This study examines whether and how the gender composition of local governments influences the information environment of local firms. The extant economic literature presents a debate on whether policy outcomes of female politicians differ from those of their male counterparts. Using data from prefectural cities in China from 2005 to 2019, we isolate the gender-related impact of female officials on local firms from electoral dynamics and focus on a crucial policy outcome – the information environment of firms. We find a positive relationship between the presence of female officials and the information transparency of local firms. Also, this gender effect intensifies during high corruption periods and in gender-diverse firms but diminishes when national uncertainty is high. Overall, our empirical results contribute to the ongoing debate on gender differences in policy outcomes by supporting the gender differences model that female politicians tend to adopt a gender-specific leadership style in competitive environments.

Trust and corporate debt maturity mismatch: Evidence from China

AbstractThis study explores the relationship between social trust and firm debt maturity mismatch in the Chinese context. Additionally, we investigate the economic mechanisms through which social trust affects debt maturity mismatch, and the differential roles played by social trust among firms with different characteristics. We employ enterprise trustworthiness scores and provincial blood donation rates as our measures of regional social trust level and find a negative relationship between local trust and firm debt maturity mismatch, suggesting that social trust which promotes ethical norms acts as a restraint on firms' propensity for excessive risk. An alternative but consistent explanation is higher social trust increases debtors' willingness to lend, hence it reduces firms' funding costs and consequently the potential cost‐saving motivation behind such a mismatch. We further document evidence that social trust improves the firm information environment and consequently risk‐taking and/or the ability to reduce funding costs. The study also reveals variations in the role of social trust based on firm characteristics, such as leverage and profitability, and the ownership structure (state‐owned enterprises vs. non‐state‐owned enterprises). The findings contribute to the literature by highlighting the increasing importance of social capital for policy and governance.

Securities and Exchange Commission Regulation and Non-GAAP Income Statements

ABSTRACTWe study firms’ decisions to provide non-GAAP income statements and the information environment consequences of Securities and Exchange Commission (SEC) comment letters directing them to stop disclosing such statements. We find firms voluntarily disclose non-GAAP income statements when firm and disclosure complexity, analyst following, and institutional ownership are higher. Using a difference-in-differences design, we find that, after firms stop disclosing full non-GAAP income statements at the direction of the SEC, the informativeness of non-GAAP earnings and overall earnings announcements decreases, information asymmetry increases, and analyst forecasts become less accurate and more disperse. We also find that firms not receiving a comment letter are more likely to stop providing non-GAAP income statements after an industry peer receives a non-GAAP income statement comment letter. Overall, our evidence suggests SEC comment letters about non-GAAP income statements appear to worsen the information environment for firms previously providing those statements.Data Availability: Data are available from the public sources cited in the text.

Does foreign institutional ownership matter for stock price synchronicity? International evidence

We investigate the relation between foreign institutional ownership and stock price synchronicity, and whether this relation varies across country-level institutional and information infrastructures. Using a comprehensive dataset for firms across 40 countries over the period between 2000 and 2016, we document the following notable findings. First, foreign institutional ownership is negatively associated with stock price synchronicity. Second, we find that improved information transparency is a possible channel underlying the effect of foreign institutional ownership on stock price synchronicity. In addition, the synchronicity-reducing effect of foreign institutional ownership is more pronounced for firms in countries with weaker institutional infrastructures. Finally, our results reveal different impacts of foreign institutional ownership on stock price synchronicity across various types of foreign institutional ownership, highlighting the importance of foreign investor heterogeneity in improving firm information environment.

The Information Environment of Firms with Worker Representation on Corporate Board

The Information Environment of Firms with Worker Representation on Corporate Board

Investigating the Determinants of Credit Spread Using a Markov Regime-Switching Model: Evidence from Banks in Taiwan

In this study, we investigate the determinants of credit spread using a Markov regime-switching model. We consider corporate governance variables and credit risk to analyze the determinants of credit spread. The corporate governance mechanism is an indicator of company sustainability, and credit spread is the main factor in profits obtained by banks. However, the relationship between credit spread and corporate governance is seldom discussed. We focus on loans from banks in Taiwan between 2000 and 2019 and apply a Markov regime-switching model, which is superior to other models in capturing different effects in various regimes. We specify two regime types: corporate governance and credit risk regimes. Furthermore, we consider four aspects of corporate governance: firm ownership structure, board structure, deviation, and information environment. In this study, the determinants of credit spread are investigated more thoroughly than in previous studies. Moreover, in this study, we examine the effects of monetary policy and economic status on credit spread using a Markov regime-switching model; such models are not employed to their full extent in related studies of credit spread. Empirical results indicate that credit spread has different effects in various regimes. Thus, understanding the determinants of credit spread in different regimes is crucial for financial analysts, investors, economic policymakers, and banks. Consequently, we expect that this study can improve the management and measurement of credit risk and be of value to financial institutions.

The effects of corporate name changes on firm information environment and earnings management

We study how corporate name changes affect a firm's information environment and its earnings management. We show that the stock market reacts negatively to name changes. This effect is specifically pronounced for firms that have lower visibility. We also find that firms that change their names tend to have a relatively worse information environment. Finally, we show that earnings management is positively related to firm name changes.

Bank loan covenants, accrual quality and firms’ information environment

AbstractWe examine whether initiations of bank loans with financial covenants motivate banks to monitor borrowers’ accounting practice and result in a higher quality of reported accruals and a better information environment for firms. We document that, relative to loans without financial covenants, loans with financial covenants lead to an improvement in accrual quality measured by the extent to which accruals can be mapped into cash flows. The effect of loan covenants on accrual quality is stronger when external monitoring by non‐bank stakeholders (i.e., institutional investors and financial analysts) is weaker. Furthermore, initiations of bank loans with financial covenants are related to subsequent improvements in analysts’ information environment. The evidence supports the view that bank monitoring improves accounting quality.

Measuring Managerial Ability: A Retrospective and Review of the Literature

In this paper, we discuss the managerial ability score (MA Score) developed in Demerjian et al. (2012). In the first section, we provide an overview of the development of the score, including the conceptual definition of managerial ability; the implementation of the score using DEA and regression analysis; and some limitations of the score. In the next section, we review research that has used the MA Score as a primary variable. The review, organized by topic, includes papers on firm performance, financial reporting, tax reporting, firm information environment, investment, debt contracting, and executive hiring and compensation contracting. In the final section we recommend directions for future work. This includes extending the original model presented in Demerjian et al., and ways that the growing literature on managerial ability can link to other streams of research.

Unearthing Firm Value: The Effect of Mandatory Sustainability Disclosures on Firm Information Environments

Unearthing Firm Value: The Effect of Mandatory Sustainability Disclosures on Firm Information Environments

Information Externalities of SFAS 161: Evidence from Supply Chains

ABSTRACTEffective in 2009, SFAS 161 requires enhanced disclosures about derivative use and hedging activities. We test for changes to the information environment of firms whose disclosure policy is unaffected by this standard directly. Using a sample of non-users of derivatives, we find an increase in stock liquidity after their critical customers expand derivative disclosures under SFAS 161. The effect persists for one year and becomes insignificant in subsequent years as the firms dial back their voluntary disclosure. The effect is also more salient for firms that have stronger economic links with their customers and for firms whose customers exhibit more significant improvements in derivative disclosures. The findings suggest that the mandatory derivative disclosures due to SFAS 161 lead to short-term positive information externalities along supply chains.Data Availability: Data are available from the public sources cited in the text.JEL Classifications: G32; M41; M48.

Do M&A Delistings Impact U.S. Capital Markets? Evidence of Negative Information Externalities for Industry Peer Firms

This study examines whether M&A delistings are associated with a deterioration in the quality of analysts’ information environment for industry peer firms. Delisted firms cease to trade and provide stand-alone financial reports, depriving analysts of potentially useful industry-level information for analyzing industry peer firms. We document that M&A delistings are associated with increases in absolute forecast errors and dispersion for industry peer firms that persist for at least six quarters. This effect is larger when the delisted firm is relatively more important to its industry. Additional analyses – including analyses of M&As involving private target firms, non-completed M&As, and an analyst-level comparison of analysts who follow versus those who do not follow delisted firms – suggest that our results (1) reflect a loss of useful information to analysts, and (2) are robust to endogeneity bias from correlated omitted industry shocks. Our results provide evidence of broader industry-wide informational effects of M&A delistings.

Economic policy uncertainty and analysts’ forecast characteristics

We examine the influence of economic policy uncertainty (EPU) on the characteristics of analysts’ earnings forecasts over a thirty-year period, spanning a wide variety of political and economic conditions. Motivated by both theory and empirical evidence that suggest a decline in the quality of the information environment for firms as EPU increases, we establish that analysts’ forecast errors increase with EPU, as does the degree of forecast dispersion. Increased error and dispersion persist after controlling for several competing sources of economy-wide uncertainty. Cross sectional analysis exploring heterogeneity in forecast quality across both analyst and firm characteristics establishes that forecast error and dispersion increase with EPU across a broad spectrum of firms and levels of analyst expertise. We control for analysts’ experience overall and the years spent covering a particular industry and firm. Five alternative methods for classifying firms as policy sensitive versus policy neutral provide consistent evidence that analyst forecast errors and dispersion increase with EPU, even for firms not deemed to be particularly sensitive to policy.

Voluntary Adopters of Integrated Reporting – Evidence on Forecast Accuracy and Firm Value

AbstractThis study investigates how integrated reporting (IR) creates value for investors. It examines how providers of financial capital benefit from an improved firm information environment provided by IR. Specifically, this study investigates the effect of voluntary IR disclosure on analyst earnings forecast accuracy as well as on firm value. To do so, we use an international sample of 167 listed companies that voluntarily publish an integrated report. Our analysis shows no significant effect of a voluntary IR publication on analyst earnings forecast accuracy and no significant effect on firm value. We thus do not find evidence for the fulfillment of IR's promises regarding improved information environment and value creation of voluntary adopters. We conclude that such companies might already have a relatively high level of transparency leading to an absent additional effect of IR disclosure. Positive effects of IR appear to be more relevant in environments where IR is mandatory.

Market information traveling on high-speed rails: The case of analyst forecasts

This study examines the causal effects of high-speed rail (HSR) on the forecast accuracy of sell-side analysts. Although transportation infrastructure may reshape business activities, comparatively little attention has been paid to the impact of traveling cost on the information acquisition of analysts. In this study, we exploit a quasi-experiment of variation in China's HSR and use difference-in-differences estimation to show the following. (1) HSR substantially increase forecast accuracy for firms located in the cities connected to HSR. (2) To address endogeneity, we introduce a placebo test and instrumental variable based on the hypothetical least-cost HSR networks, and the results are highly consistent. (3) A plausible mechanism is that HSR increase the probability of analysts' visit of listed firms rather than via increased analyst coverage and an improved firm information environment. (4) Our findings are more pronounced for firms with high accrual quality, firms audited by a Big 4 auditor, and firms located nearer information centers. Overall, we provide the first empirical evaluation of the economic consequences of HSR in terms of analyst forecast and market information transmission.

Shariah compliance and information transmission: evidence from an emerging market

Purpose This paper aims to document the information transmission capacity of Shariah-compliant firms. Design/methodology/approach The vector auto-regression (VAR) model is used to test the information transmission capacity of Shariah-compliant firms in India during the period between 2010 and 2015. Findings The findings show that the returns of non-Shariah-compliant firms lead the returns of Shariah-compliant firms. It is argued that non-Shariah-compliant firms possess certain financial characteristics (higher leverage, higher accounts receivable and higher cash holdings) that make their information environment better than information environment of Shariah-compliant firms. The authors argue that superior information environment leads to timely incorporation of market-wide information, thereby causing the returns of non-Shariah-compliant firms to lead the returns of Shariah-compliant firms. It is also shown that the result holds in various market conditions. Originality/value It is believed that prior literature does not adequately address the information transmission capacity of the stock prices of Shariah-compliant firms. The gap is filled by documenting that stock prices of Shariah-compliant firms that are more informative than stock prices of non-Shariah-compliant firms.

Does Time-Space Compression Affect Analysts’ Forecast Performance?

Through the difference-in-differences (DID) methodology, we find that the connection of China’s high-speed railway (HSR) as an exogenous shock could improve analysts’ forecast performance, leading to more accurate forecasts, decrease the dispersion between analysts, stimulate more forecast revisions with less revision volatility, evidenced by analyst site visits to firms. The results are robust with a battery of robustness checks such as 2SLS regression and so on. And the counterfactual relations caused by the lightning accident in 2011 also confirm our previous assumption. Furthermore, when the local economic development is weak, the trips by HSR is more convenient, or the information environment of firms are weak, the correlations will be stronger. Moreover, the connection of HSR also improves the information availability of stock recommendations issued by analysts. Overall, our study contributes to the relevant study of sell-side analysts’ performance and has an important impact on studying the role of geographic proximity on information efficiency.