Flow Of Firm-specific Information Research Articles

Retail investors' accessibility to the internet and firm-specific information flows: Evidence from Google's withdrawal

Internet search is an important channel through which retail investors gather and process information. This paper investigates whether limiting the retail investors' accessibility to the Internet could affect the incorporation of firm-specific information in prices, as measured by stock price synchronicity. Using Google's withdrawal of search services from China as an exogenous shock, I employ the matching-based difference-in-differences design and find an increase in synchronicity after Google's withdrawal, equivalent to a 4.6% growth in R2. Further analysis shows that the synchronicity measure arguably captures firm-specific information rather than noise. In addition, the improved synchronicity is concentrated in subsamples where firms' corporate disclosures are verbose and few, firms are geographically inaccessible, and the managerial entrenchment effect dominates the incentive alignment effect in corporate governance. The results are not driven by alternative explanations and are robust to alternative samples, alternative variable constructions, and the inclusion of more control variables.

A discussion of “information processing costs and firm-specific information flows: evidence from the launch of high-speed railway in China”

PurposeThis paper aims to discuss the strengths and limitations of Zhao et al. (2022). The author also provides suggestions for future research.Design/methodology/approachThe author initially reviews prior literature studies relevant to this study, i.e. the literature on the relation between geographic proximity and information transfer/acquisition, to better position this paper in existing literature and then briefly discusses the strengths and weaknesses of this paper to provide more insights. Finally, the author presents some possible directions for future research, highlighting the importance of separately examining headquarters and plants in this research setting, and motivating future research on the development of information technology.

Information processing costs and firm-specific information flows: evidence from the launch of high-speed railway in China

PurposeThe findings suggest that reducing information processing costs as a result of better transportation is an important ingredient in promoting the pricing of firm-specific information. This study aims to discuss the aforementioned issue.Design/methodology/approachThe authors adopt a difference-in-difference (DID) research design to examine the impact of information processing costs on stock price synchronicity with a sample of firms listed in the Chinese A-share market during 2007 and 2017.FindingsThis paper shows that the launch of the high-speed railway (hereafter HSR) in China is associated with lower stock price synchronicity, consistent with the theory that the HSR reduces investors’ information processing costs (cost of monitoring, acquiring and analyzing firm disclosures). This effect is more pronounced for companies located in remote areas than for those located in large cities. Further tests show that the negative association between the launch of HSR and stock price synchronicity is stronger for companies with higher information asymmetries, proxied by higher equity concentration, higher complexity and lower internal control quality.Originality/valueThis study contributes to the literature in the following three ways. First, prior literature relates the effects of geographic distance to information transmission and information asymmetry between insiders and outside investors (e.g. Coval and Moskowitz, 2001; Kang and Kim, 2008; Malloy, 2005). The authors supplement the literature by providing new empirical evidence from an exogenous shock (natural experiment), that is, the launch of HSR, that facilitates transportation and reduces information transmission costs. Second, prior studies have shown that new airline routes that facilitate transportation improve investment and productivity (e.g. Bernstein et al., 2016; Giroud, 2013). The authors extend this stream of studies by showing that the development of HSR networks reduces information processing costs, and promotes the incorporation of firm-specific information in the asset pricing. More importantly, in this study, the authors explicitly incorporate disclosure processing costs theory into our framework thus enhancing our understanding of how and why improvements in transport relate to better market outcomes.

ETF ownership and firm-specific information in corporate bond returns

We analyze the relation between ETF ownership and firm-specific information in corporate bond returns. ETF ownership appears to weaken bond price informativeness by altering the flow of firm-specific information to bonds. Bonds with low (high) ETF ownership are sensitive (insensitive) to the same information as equity. Using earnings announcements, we show that bonds with low ETF ownership react to earnings news, but bonds with high levels do not. Moreover, we find a positive association between investment-grade bond return comovement with the market and ETF ownership, implying that return variation is less attributable to firm-level information as ETF ownership increases.

ETF Corporate Bond Ownership and Market Quality

This paper examines the role exchange-traded funds (ETFs) play in providing information to underlying corporate bond markets. We document liquidity improvements for individual corporate bonds regardless of market direction. That increased liquidity, however, comes at the cost of greater market sensitivity. Three separate tests show that increased ETF ownership increases the systematic risk component of bond prices and disrupts the flow of firm-specific information to underlying bonds. The results suggest, therefore, that while ETF ownership improves bond market liquidity, ownership is associated with a dissociation between bond prices and firm fundamentals. Mutual fund ownership does not have the same effect, suggesting the active intraday trading that is the hallmark of ETFs may also serve as the mechanism through which information flow is affected.

IAS 41 and stock price informativeness

ABSTRACTWe investigate whether the adoption of International Accounting Standard 41: Agriculture influences firm-specific information flows capitalized into stock prices and thus affects stock price informativeness. Using a sample of IAS 41 adopters from countries that mandates IFRS in 2005 and the control samples of non-IAS 41 adopters, we find that price informativeness for IAS 41 adopters increases following IAS 41 adoption. We also find that the effect of IAS 41 adoption is similar between firms that transforms bearer plants, which derive value in use of assets and other biological assets. Overall, our results are consistent with the notion that the increased transparency from IAS 41 adoption broadly facilitates firm-specific information flows entering into stock market and thereby reduces synchronicity, making stock price more informative.

When do CDS spreads lead? Rating events, private entities, and firm-specific information flows

We find that credit default swap (CDS) spreads contribute significantly to price discovery in financial markets when firm-specific credit information is prominent. Using 3,470 S&P rating notch and watch changes for US public and private entities from 2001–2013, we show that CDS prices contain unique firm credit risk information that is not captured by the prices of other related securities such as stocks and bonds of the same firm. Credit information unidirectionally flows from CDS to bonds, particularly for private entities whose stocks are not concurrently trading in markets. We further find that CDS returns significantly predict stock returns, particularly their idiosyncratic components.

Political connections, institutional investors monitoring and stock price synchronicity

PurposeThe purpose of this paper is to examine the association between politically connected (POLCON) firms and stock price synchronicity, and whether this association can be attenuated by institutional investors.Design/methodology/approachThis paper uses an ordinary least square regression model to examine the association between POLCON firms and stock price synchronicity; institutional ownership and stock price synchronicity; the moderating role of institutional ownership on the association between POLCON firms and stock price synchronicity; institutional domiciles and stock price synchronicity; and the moderating role of institutional domiciles on the association between POLCON firms and stock price synchronicity.FindingsThe result shows that POLCON firms are positively associated with stock price synchronicity. Further, the author also finds that institutional monitoring, through higher ownership by local institutional investors is associated with lower stock price synchronicity. In addition, this study documents evidence that institutional investors, particularly local institutional investors can improve stock price informativeness in POLCON firms.Research limitations/implicationsThe results suggest that POLCON firms are plagued by severe agency problems, resulting in limited flow of firm-specific information to the capital markets. However, the author shows that POLCON firm’s agency problems can be attenuated through effective monitoring by institutional investors. Further, institutional domiciles are shown to be significantly associated with stock price synchronocity. However, effective monitoring is largely driven by local institutional investors, in line with the geographical proximity theory.Practical implicationsThe results suggest that regulators should increase their surveillance and monitoring effort, particularly on firms with close ties to the government. In particular, POLCON firms should be required to be more transparent in their corporate dealings. Additionally, auditors should intensify their audit efforts on POLCON firm to provide more reliable financial information to minority shareholders, investors and analysts. Finally, institutional investors should be incentivized by the Malaysian Securities Commission, via, the code of governance to play an effective monitoring role in Malaysian firms.Originality/valueThis study reveals that POLCON firms’ severe agency problems can be alleviated by effective institutional monitoring. Further result identifies institutional domiciles as a significant factor in influencing monitoring effectiveness in POLCON firms. This paper provides insights into the dynamic interaction between political connections, institutional monitoring, firm governance and capital markets behavior of an emerging market.

When Do CDS Spreads Lead? Rating Events, Private Entities, and Firm-Specific Information Flows

We find that CDS spreads contribute significantly to price discovery in financial markets when firm-specific credit information is prominent. Using 3,470 S&P rating notch and watch changes for U.S. public and private entities from 2001-2013, we show that CDS prices contain unique firm credit risk information that is not captured by the prices of other related securities such as stock and bonds of the same firm. Credit information unidirectionally flows from CDS to bonds, particularly for private entities whose stocks are not concurrently trading in markets. We further find that CDS returns significantly predict stock returns, particularly their idiosyncratic components.

Corporate governance, foreign ownership and stock price synchronicity: evidence from Borsa Istanbul

This study investigates the impact of corporate governance and foreign ownership on the flow of firm-specific information to stock prices in Turkey. This study contributes to the existing literature by examining the relation between governance, ownership and stock price synchronicity that describes firm level information asymmetry and transparency in Turkey. We examine the effects of CEO duality, board independence, board size and foreign ownership on the amount of firm-specific information incorporated into share prices, as measured by stock price synchronicity, for listed firms in Borsa Istanbul 100 Index over 2009–2014 period. We support the view that the R square value in one of the emerging stock markets, Turkey is relatively high. We find that firms with better corporate governance, more independent directors in the board and higher foreign ownership have more firm-specific information incorporated into stock prices and less stock price synchronicity.

Foreign ownership and stock price synchronicity: evidence from Turkey

This study investigates the impact of foreign ownership structure on the flow of firm specific information to stock prices in Turkey. This paper will be first to examine the relationship between ownership and stock price synchronicity in Turkey. We examine the effects of foreign ownership on the amount of firm specific information incorporated into share prices, as measured by stock price synchronicity, for listed firms in Borsa Istanbul 100 Index over the 2009–2014 period. We support the view that the R squared value in one of the emerging stock markets, Turkey is relatively high. We hypothesize and show that stock price synchronicity is lower for firms which have more foreign ownership ratios. That supports more firm specific information is incorporated into stock prices as the ratio of foreign ownership increases

Corporate governance and transparency: evidence from stock return synchronicity

Purpose – The purpose of the study is to examine the influence of corporate governance on the flow of firm-specific information in an emerging market. Design/methodology/approach – Synchronicity is estimated under assumptions of contemporaneous and non-contemporaneous relationship between individual stock returns and the market return. Possible thin-trading effect is also corrected using the Dimson’s Beta approach to estimate synchronicity. In the main empirical model, both the Panel-Corrected Standard Errors and the Generalized Least Square estimations were used to provided robust evidence of governance influencing transparency. Findings – Corporate governance was found to broadly influence the release of firm-specific information in a relatively opaque market through the information environment. However, no evidence in support of the “auditor-reputation effects” theory was found. As well, CEO duality does not create an individual powerful enough to reduce the monitoring role of boards. We further document the presence of noise trading on the Ghana Stock Exchange. Practical implications – This study suggests that specific corporate mechanism practices have implications for stock selection in a relatively high information asymmetry Capital Market. Investors require transparency; hence, firms with governance mechanisms that elicit such transparency are likely to attract investors. Originality/value – This study is the first to examine the relationship between governance and transparency while using stock return synchronicity as a proxy for transparency in an emerging Ghanaian Capital Market.

Economic Effects of IFRS Adoption in Brazil: An Empirical Analysis of Stock Price Synchronicity

This study aims to identify the impact of IFRS adoption in stock price synchronicity of Brazilian capital market through its influence on how much and in which way firm-specific information is incorporated by stock prices. There are divergences in the literature about how IFRS adoption (specially the mandatory adoption) affects synchronicity in countries with poorer institutions. Our results indicate that IFRS adoption in Brazil has reduced stock price synchronicity and, consequently, increased the efficiency of resource allocation and potential portfolio diversification. These findings support the view that IFRS adoption facilitates firm-specific information flows into the market, improving the informational environment. This findings show that investment conditions in Brazil have improved, opening better opportunities for foreign investments on the country, contributing to financial globalization and market integration.

Does accounting conservatism improve the corporate information environment?

This study investigates whether and how accounting conservatism improves the corporate information environment. We argue that conservatism facilitates the flow of firm-specific information from corporate insiders to outsiders and leads to a high-quality information environment. Using the Basu (1997) model to capture the extent of accounting conservatism and firm-specific return variation to proxy for the quality of information environment, we find that conservatism is positively associated with the improvement of the corporate information environment in our sample of 43 countries. We also find that the information role of conservatism is more pronounced in countries with weaker protection of private property rights, suggesting that conservatism substitutes for legal institutions in ensuring the quality of information environment.

Insiders’ incentives for asymmetric disclosure and firm-specific information flows

Recent research suggests that insiders’ incentives for capturing cash flows affect price formation process in which insiders are inclined to withhold good news and to accelerate the release of bad news (Jin and Myers, 2006). We investigate whether insiders’ incentives for private control benefit, proxied by control-ownership wedge, affect firm-specific return characteristics. We find that control-ownership wedge is negatively related to the likelihood of positive return jumps and positively related to the extent of asymmetric market reaction to good news rather than to bad news. Overall, our results support the notion that corporate insiders increase opaqueness and withhold good news in order to capture unexpected cash flow.

Does Beta Move with News? Firm-Specific Information Flows and Learning about Profitability

We investigate whether stock betas vary with the release of firm-specific news. Using daily firm-level betas estimated from intraday prices, we find that betas increase on earnings announcement days and revert to their average levels two to five days later. The increase in betas is greater for earnings announcements that have larger positive or negative surprises, convey more information about other firms in the market, and resolve greater ex ante uncertainty. Our results are consistent with a learning model in which investors use information on announcing firms to revise their expectations about the profitability of the aggregate economy.

IFRS reporting, firm-specific information flows, and institutional environments: international evidence

This study investigates whether and how a firm’s voluntary adoption of International Financial Reporting Standards (IFRS) influences the extent to which firm-specific information is capitalized into stock prices measured by stock price synchronicity. We also study the role of analyst following and institutional environments in determining the relation between IFRS reporting and synchronicity. Using firm-level data from 34 countries, we find that synchronicity is significantly lower for IFRS adopters than for non-adopters across all regression specifications and that for IFRS adopters it decreases from the pre-adoption period to the post-adoption period. This finding supports the view that voluntary IFRS adoption facilitates the incorporation of firm-specific information into stock prices, thereby reducing synchronicity. We also find that the synchronicity-reducing effect of IFRS adoption is attenuated (accentuated) for firms with high (low) analyst following and is stronger (weaker) for firms in countries with poor (good) institutional environments.

Information Flows, Tax Avoidance Policy and Firm-Level Institutional Variation: International Evidence

Using a large sample from 14 Offshore Financial Centers (OFCs) and from 35 non-OFC countries and jurisdictions, we investigate the extent to which firm-specific information flows are capitalized into stock prices measured by stock price synchronicity. Moreover, we explore the firm-specific information flows of U.S. and U.K. companies that set up affiliates in an OFC or OFCs. We find that synchronicity is higher via a firm’s operations in OFCs, either through direct legal registration or incorporation or, indirectly, through subsidiaries and affiliates than non-offshore companies. Our evidence is important, because it reveals the intertwined effects between tax avoidance policy and firm-level institutional variation on the impounded firm-specific information into stock prices. Furthermore, we also find that the extent of synchronicity varies regarding offshore attributes.

Does Beta Move with News? Firm-Specific Information Flows and Learning About Profitability

We investigate whether the betas of individual stocks vary with the release of firm-specific news. Using daily firm-level betas estimated from intra-day prices for all constituents of the S&P 500 index, we find that the betas of individual stocks increase by an economically and statistically significant amount on days of quarterly earnings announcements, and revert to their average levels two to five days later. The increase in betas is greater for earnings announcements with larger positive or negative earnings surprises, for announcements that convey more information about other firms in the market, and for announcements that resolve greater ex-ante uncertainty. Our empirical results are all consistent with a simple learning model in which investors use information on announcing firms to revise their expectations about the profitability of the aggregate economy.

Corporate Tax Avoidance and the Level and Valuation of Firm Cash Holdings

This paper examines the relation between corporate tax avoidance and firm cash holdings. Corporate tax avoidance limits payments made to the tax authorities. However, recent research notes that tax avoidance also restricts the flow of firm specific information and thereby exacerbates manager-shareholder conflict of interest. Specifically, it is argued that tax avoidance allows for greater rent extraction by managers. We examine this implication in relation to firm cash holdings. Cash is a fungible asset that can be easily diverted. To the extent that tax avoidance facilitates greater rent extraction, it will lead to a quicker dissipation of firm cash holdings. We empirically evaluate this prediction. To further evaluate the influence of tax avoidance, we also examine its impact on the valuation of firm cash holdings. If investors perceive tax avoidance as enabling diversion of firm resources, it should negatively impact their valuation of firm cash holdings. We provide three primary findings. First, we find a negative association between tax avoidance and firm cash holdings. We find this association to hold across multiple measures of tax avoidance. Second, we find this relation is attenuated for firms with stringent governance structures in place. This finding suggests stringent governance structures serve to limit the adverse effects of tax avoidance strategies. Finally, we find investor valuation of firm cash holdings is lower for firms with higher levels of tax avoidance. We again find this relation is attenuated for strong governance firms. Overall, our findings contribute to a growing stream of research which notes that tax avoidance is a double-edged sword which can cause more harm than good for shareholders.