Greater Information Asymmetry Research Articles

FinTech Credit and Entrepreneurial Growth

ABSTRACTBased on automated credit lines to vendors trading on Alibaba's online retail platform and a discontinuity in the credit decision algorithm, we document that a vendor's access to FinTech credit boosts its sales growth, transaction growth, and the level of customer satisfaction gauged by product, service, and consignment ratings. These effects are more pronounced for vendors characterized by greater information asymmetry about their credit risk and less collateral, which reveals the information advantage of FinTech credit over traditional credit technology.

Social media attention and corporate greenwashing: Evidence from China

AbstractThis study examines the effect of social media attention on corporate greenwashing using a sample of Chinese A‐share listed firms from 2011 to 2021. We find that social media attention increases corporate greenwashing, and the effect is more pronounced for firms with negative financial performance and those with violations, supporting the pressure hypothesis. Drawing on fraud triangle theory, which considers the interplay of pressure, opportunity, and rationalization, we also find that the pressure effect is more pronounced for firms with higher CEO power, greater information asymmetry, as well as firms located in regions with a gambling culture and non‐state‐owned firms. This indicates that firms are more inclined to greenwash when they perceive an opportunity and can rationalize this behavior. Furthermore, our heterogeneity analyses demonstrate that the pressure effect is more significant for firms located in regions characterized by higher marketization, firms operating in non‐heavily polluting industries, and those that do not provide assured non‐financial reports. This study contributes to the literature on the role of social media and determinants of corporate greenwashing, providing important implications for firms' sustainable development.

Dividend policy under mandatory ESG reporting

Governments and stock exchanges worldwide are increasingly mandating firms to disclose their environmental, social, and governance (ESG) performance. This study examines whether firms adjust their dividend policies following the implementation of mandated ESG reporting. Leveraging the staggered adoption of mandatory ESG reporting using a large international dataset spanning from 1996 to 2019, we find a substantial and negative impact on corporate dividends. Specifically, we observe that firms subject to mandatory ESG reporting, on average, reduce their dividend payout ratios by approximately 25% immediately after its implementation. Further analysis reveals that this response is more pronounced for firms facing higher agency conflicts and operating in environments with greater information asymmetry, as these firms are more difficult to monitor. Additionally, we find that the impact is stronger for firms located in countries with less developed stock markets and higher financial constraints. Exploiting cross-country variations in the regulatory framework of ESG reporting, we find a heightened response in jurisdictions with stricter disclosure requirements.

Shedding light on foreign currency cash flow hedges: transparency and the hedging decision

Utilizing firms in the S&P 500, we study whether greater transparency in the reporting of other comprehensive income (OCI) items, as mandated by ASU 2011-05, resulted in a reduction in information asymmetry, a change in the value relevance of this information, or a change in hedging practice. Our results show that while transparent reporting reduced information asymmetry, firms that engage in cash flow hedging do have greater information asymmetry than their counterparts that do not hedge. We find evidence that investors penalize firm value for greater volatility of OCI relative to net income volatility when reported transparently. When permitted, managers were able to mitigate the negative impact by reporting OCI only in the Statement of Shareholders’ Equity. We conclude that managers’ concerns regarding potential confusion surrounding OCI volatility following more prominent reporting led to changes in hedging behavior. After transparent reporting, we find a reduced likelihood of foreign currency cash flow (FXCF) hedges and a reduced level of FXCF hedging among firms experiencing the greatest volatility of unrealized hedging gains and losses.

Green credit regulation and market efficiency: A perspective of irrational trading

Green credit regulation may increase the operating uncertainty and worsen the financial reporting quality for pollution intensive firms. Literature mentions that enhanced information asymmetry would trigger more irrational trading and lead to a decrease in the market efficiency, which is worth investigating under green credit regulation. Using the data of China's A-share listed firms from 2009 to 2015, we study the relationship between green credit regulation and market efficiency based on a difference-in-differences analysis. It finds that green credit regulation reduces market efficiency of pollution intensive firms. Mechanism tests show that policy effects are more pronounced in firms with higher operating uncertainty, greater information asymmetry and stocks with more irrational traders. This study not only contributes to a deeper understanding of the impact of green credit policies on business and stock markets based on irrational theory, but also provides valuable guidance for green finance and economic development.

Impacts of firm life cycle on bond ratings and yields

AbstractWe examine how firm life cycle affects ratings and costs of debt for public offers. We find that ratings for issuers in the introduction and decline stages are lower than those for growth and mature issuers. A similar U‐shaped relation between life stage and yield spread, after controlling for credit rating, indicates that life stage affects cost of debt through multiple channels. Costs of debt are lower for growth and mature issuers than for introduction and decline issuers. Analyses of high‐yield bonds and term to maturity suggest that the adverse effect on costs of debt for introduction and decline firms is associated with their elevated riskiness and greater information asymmetry.

Do suppliers value clients’ ESG profiles? Evidence from Chinese firms

We investigate whether suppliers value their clients' ESG profiles in China, the largest emerging market featuring low ESG awareness and severe agency problems. We find a robust and negative impact of Chinese firms' ESG scores on their access to trade credit. The 2SLS regression results based on the instrumental variable indicate that the impact is casual. Additionally, the impact is more pronounced for firms with higher agency costs, greater information asymmetry, worse financial performance, and larger ex-ante default risk. These results suggest that suppliers in China view clients' ESG engagement as costly investments caused by agency problems. Finally, we highlight the economic importance of ESG's negative impact on trade credit by showing that trade credit access helps Chinese firms decrease debt costs, increase trade credit provision to downstream firms, and promote R&D inputs.

Do industry-specific accounting standards matter for capital allocation decisions?

This study examines whether the implementation of industry-specific accounting standards helps capital market participants in making decisions about providing capital to firms. We predict and find an, on average, increase in firms’ capital growth in years following implementation of the relevant industry standard. The increase in capital growth arises primarily from equity issuances and is attributable to the implementation of the standards rather than industry-specific trends or economic shocks. We explore heterogeneity in industry standards and find more pronounced effects for (i) industry standards that reveal new information, provide explicit guidance, or increase accounting uniformity, and (ii) small firms, firms with greater information asymmetry, and firms with greater capital constraints before implementation of the standards. We also find evidence consistent with two channels explaining the documented increase in capital flows: reduction of information asymmetry and increase in financial statement comparability.

How do credit ratings affect corporate investment efficiency?

AbstractThis study examines the impact of credit ratings on the efficiency of firms' investments. Using a large sample of US firms, we find a positive relationship between the existence of credit ratings and investment efficiency. The cross‐sectional analyses show the positive relationship is more pronounced for firms with greater information asymmetry and weaker corporate governance. Our results are robust to different methods to address potential endogeneity concerns, alternative measures of key variables, and the inclusion of additional control variables. Overall, the findings support the notion that credit rating agencies enhance information transparency and external monitoring, thereby allowing rated firms to promote investment efficiency. The findings contribute to our understanding of the significant role played by credit rating agencies in shaping firms' investment behaviour and efficiency.

The impacts of IFRS 16 on airlines

This study addresses the effects of the adoption of IFRS 16 on the passenger air transport sector. With practical effects for financial years beginning on or after 1 January 2019, IFRS 16 established the standardisation of a single accounting modelfor all leases, whether operating or financial. With this new adoption, IFRS 16 aims to increase the transparency and quality of the information that is presented in the financial statements for the most diverse stakeholders.
 This study aimed to assess the effects of adopting this new international standard in a specific sector and to identify whether the changes in some of the financial indicators are felt in the same way by all companies, this being the main focus of this study. Based on a sample of 12 airlines from various countries in Europe and South America, the financial indicators were interpreted by analysing the reports and accounts before and after the application of IFRS 16.
 The main conclusions obtained are: i) the adoption of IFRS 16 led to an increase in assets, liabilities and EBITDA, however in different proportions for each of these items; ii) companies with negative equity and, therefore, with greater risks of bankruptcy or greater information asymmetry, tend to resort more to leasing as a way of financing their assets; iii) the financial autonomy and solvency ratios showed significant variations for companies that resort more to operating leasing.

Earnings management risk and audit pricing: Evidence from big bath accounting

AbstractWe examine whether big baths (large and non‐recurring charges) affect auditors’ risk assessments and therefore result in higher audit fees. Prior studies have found that there is an asymmetric reaction from auditors on firms’ income‐increasing/decreasing accruals. We argue that auditors’ response to big baths is distinguishable from other types of earnings management as big baths provide incremental information to auditors beyond other earnings manipulation indicators. Our findings show that audit fees are significantly higher for firms with big baths, compared to other firms. We also present evidence that the positive relation between big baths and audit fees is stronger for firms with weaker corporate governance and greater information asymmetry. Overall, our results suggest that auditors expand their audit effort to mitigate the greater audit risk attributable to big baths, which in turn lead to higher audit fees.

Dynamic Information Regimes in Financial Markets

We develop a model of investor information choices and asset prices in which the availability of information about fundamentals is time-varying and responds to investor demand for information. A competitive research sector produces more information when more investors are willing to pay for that research. This feedback, from investor willingness to pay for information to more information production, generates two regimes in equilibrium, one having high prices and low volatility, the other the opposite. The low-price, high-volatility regime is associated with greater information asymmetry between informed and uninformed investors. Information dynamics move the market between regimes, creating large price drops even with no change in fundamentals. In our calibration, the model suggests an important role for information dynamics in financial crises. This paper was accepted by Kay Giesecke, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.01213 .

The role of sponsor representatives in SEO underpricing: Evidence from China

This study examines the role of sponsor representatives in SEO underpricing using a sample of private placements issued by Chinese firms covering the period 2007–2021. We find a robust negative relationship between private placement underpricing and qualified sponsor representatives who recommend the private placements, indicating that sponsor representatives provide high-quality services and in turn enhance the pricing efficiency of private placement market. This relationship is more pronounced for private placement issues that have higher financial distress, greater information asymmetry, and are located in weaker business environment. And the role of sponsor representatives is enhanced after China's registration system reform and issue-pricing rules revision.

재무제표의 비교가능성과 기업의 ESG 활동

[Purpose] The purpose of this study is to investigate the relationship between the comparability of financial statements and a company's ESG activities. With the growing social interest in corporate ESG activities, which has been positively associated with their economic effects, companies with higher comparability may show more active ESG activities under greater external monitoring. If external information users of companies with high comparability of financial statements can easily obtain relevant company information, they can collect and interpret more information efficiently and effectively, leading to more active external monitoring of corporate activities.
 [Methodology] Regression analysis was conducted using the ESG ratings evaluated by the Korea Institute of Corporate Governance and Sustainability (KCGS) from 2012 to 2020 and the comparability variables of financial statements. Additionally, the relationship between comparability and ESG activities was analyzed by dividing the sample depending on the levels of information asymmetry, and by alternative variable of the comparability and ESG activity to ensure the robustness of the research results.
 [Findings] The results show that companies with higher comparability have more active ESG activities, particularly in governance and environmental－related activities, which showed a significant positive relationship. Moreover, the positive relationship between the comparability and ESG activities was more evident in companies with greater information asymmetry, indicating that comparability improves the information environment surrounding companies and strengthens the monitoring function of ESG activities.
 [Implications] The study contributes to academic knowledge by demonstrating that the attribute of accounting information, such as the comparability of financial statements, affects a company’s ESG activities.

Pre-and-aftermarket IPO underpricing: Does use of proceeds disclosure matter?

Exploiting a unique regulatory framework for IPO pricing in India, which allows us to estimate voluntary and aftermarket underpricing, we answer whether specific use of proceeds explains underpricing in the pre- and aftermarket. Our main findings are as follows. First, we document that disclosure of specific use of proceeds increases actual voluntary underpricing (i.e., offer price being lower) in the premarket and lowers aftermarket underpricing (i.e., the first-day closing price is lower). Second, the premarket effect is pronounced for firms with greater information asymmetry, whereas the aftermarket effect is pronounced for firms with higher investor sentiment. Our core findings are robust to tests that mitigate endogeneity concerns. Collectively, we show that disclosure impacts underpricing differently in the pre- and aftermarket.

특수관계자 거래가 주가지연현상에 미치는 영향

[Purpose]Korean firms have a characteristic that ownership is concentrated on specific people and relatives, and it has been reported that controlling shareholders pursue private interests through related party transactions. Firms report related party transactions through footnotes in financial statements, but the disclosure details are different for each firm. Therefore, firms with larger related party transactions have greater information asymmetry, so stock prices are not expected to immediately reflect transaction information.
 [Methodology]The sample period used in this study was from 2011 to 2019, and an analysis was conducted on non－financial firms listed in the Korean stock market. Financial data and stock price data used in the analysis were extracted from the KIS－VALUE database, and data on related party transactions were collected from the TS2000 database. Referring to the study of Hou and Moskowitz (2005), stock price delay, a dependent variable of the study, was measured.
 [Findings]The level of related party transactions had a positive relationship with the stock price delay phenomenon. The result can be interpreted as a slower rate at which stock prices reflect corporate information because firms with larger related party transactions have lower information transparency. In addition, the positive relationship between the size of related party transactions and the stock price delay phenomenon was significant only in chaebol firms.
 [Implications]The results of this study call attention to investors so that they can make careful investment decisions in consideration of the fact that the larger related party transactions, the stronger the stock price delay may appear. In addition, it suggests that regulatory agencies need to reorganize related laws so that details of related party transactions are disclosed in order to prevent market abnormalities such as stock price delays.

The effects of signaling blockchain‐based track and trace on consumer purchases: Insights from a quasi‐natural experiment

AbstractBlockchain‐based track and trace (BCT) is increasingly adopted in the retail supply chain. However, there is little rigorous empirical evidence quantifying the effects of BCT on consumer purchases or examining the heterogeneity of these effects with varying product‐related characteristics. Employing transactional data from a leading global e‐retailer that contains 540 stock keeping units (SKUs), we design a quasi‐natural experiment spanning 80 weeks to estimate the signaling effect of BCT (i.e., disclosure of the BCT to consumers) on consumer purchases. Drawing on the signaling theory, we propose that BCT can serve as an effective and reliable signal of the product quality and trustworthiness of the retailer. Our research uncovers significant positive effects of BCT on the average purchase quantity per buyer, the total number of buyers, the number of new buyers, and the number of unique visitors to the traced products. We also find nuanced moderation effects for two product‐related characteristics—namely, consumer review inconsistency and product origins—on the influence of BCT on consumer purchases. Specifically, the signal effectiveness of BCT is stronger for products with more inconsistent customer reviews that indicate greater information asymmetry. The effect of BCT for products sourced globally is magnified because of the high BCT signal reliability attributed to the unique properties of the blockchain. The heterogeneous effects of BCT by varying product‐related characteristics can inform managers in selecting the right products to implement BCT.

Role of Analyst Following in the Relationship between Integrated Reporting Quality (IRQ) Disclosure and Cost of Equity Capital in Developed Markets

The study aims to examine the role of analyst following (AF) in the relationship between IR quality (IRQ) disclosures and implied cost of equity capital (ICC) in the developed market in Australia and New Zealand. The study also examined whether companies with higher-quality integrated reporting (IR) benefit from the cost of equity capital reduction. The main objective is to identify the role of AF in explaining the relationship between IRQ disclosure and ICC. Besides, the study highlighted the average effects of IR benefits, which increase when there is more information asymmetry between firms and investors. Furthermore, IR could play a bigger role (with greater information asymmetry) than cross-sectional tests. The study used a common sample of 100 top companies based on Standard and Poor's market capitalisation in Australia and New Zealand (2014-2016), with 870 observations of post-implementation IR. This study showed a significant, negative relationship between IRQ and the ICC with top companies in Australia and New Zealand. Also, the results showed that AF is a partial mediator in explaining the relationship between IRQ and the cost of equity capital. The findings also indicated that AF has a vital role in IRQ disclosures, associated with a subsequent reduction in the cost of equity capital in the developed market.

Firm-level political sentiment and corporate tax avoidance

This paper examines how managers' tone on political issues in earnings conference calls relates to corporate tax avoidance. We find a positive relationship between managers' tone of using political linguistics and tax avoidance, while controlling for non-political tone. The relationship is more pronounced for firms with greater political exposure, higher lobbying expenditures, greater information asymmetry, and more risk-taking. The empirical results remain robust with various additional checks. Overall, our evidence suggests that managers employ the sentiment of political risk disclosure for aggressive tax purposes.

The effect of option listing on financing decisions

AbstractThis paper investigates the effect of option listing on corporate financing decisions. Firms experience a significant drop in leverage, which is driven mainly by an increase in new equity issues. This effect is more prominent in firms with greater information asymmetry and lower percentages of quasi‐index and transient investors before listing and those with active options trading after listing. After options are listed, the newly listed firms hold more cash and engage in more acquisitions, which are funded mainly by equity issues. These findings suggest that option listing has a significant impact on financing decisions because of lower information asymmetry and that firms use the post‐listing equity to build up financial slack and support major investments, such as acquisitions.