Higher Information Asymmetry Research Articles

Impact of using derivatives on stock market liquidity

This study demonstrates that using derivatives can significantly improve stock liquidity. We conduct several tests to check for robustness of our findings and control for potential endogeneity in our results. We observe that the decrease in stock illiquidity due to derivative usage is more pronounced for firms with high information asymmetry, high firm-specific risk, and negative investor sentiment. Ownership stakes held by foreign institutional investors and domestic promoters do not influence how derivative usage affects stock liquidity. This relationship is significant in the presence of large and independent boards. Our results emphasize the liquidity creation role of derivative usage, which complements other functions of derivatives markets, such as price discovery and risk management. Our findings are relevant for companies operating in foreign capital markets and for international investors who include Indian stocks into their portfolios.

Brand capital and corporate investment efficiency

AbstractUsing a sample of US firms from 1975 to 2021, we show that brand capital improves investment efficiency, which is robust to various measures of brand capital and investment efficiency. To mitigate endogeneity concerns, we exploit the passage of the Federal Trademark Dilution Act as an exogenous shock to brand capital and find that it strengthens the positive effect of brand capital. Our cross‐sectional analyses show that this positive relationship is more pronounced for firms with greater financial constraints and higher information asymmetry. These results suggest that brand capital reduces over‐ and under‐investment through alleviating financial constraints and information asymmetry.

Institutional blockholder monitoring and stock price crash risk

We examine whether institutional investors can reduce the risk of stock price crashes caused by managers’ intentional withholding of bad news. Specifically, we focus on the effect of institutional blockholder monitoring on stock price crash risk. The empirical results show negative relationships between institutional blockholdings and various crash risk variables, which suggests that institutional blockholder monitoring of nontransparent managerial behaviors can decrease crash risk. Furthermore, we find that the influence of monitors is more pronounced in firms with high information asymmetry, thereby corroborating the institutional blockholder monitoring role. This study validates the monitoring role of dedicated institutional investors in agency-motivated managerial behaviors.

Mitigating Investor Reactions to Financial Misconduct: The Moderating Roles of Firm Commitment Cues

AbstractCorporate financial misconduct has garnered increased interest in business ethics research. Although prior research has provided insights into the consequences of financial misconduct, our understanding of why investors react differently to similar instances of misconduct, especially in emerging markets, remains limited. In this study, we first argue that direct information on the severity of misconduct is the primary basis for investors’ evaluations. Next, drawing on screening theory, we theorize that in contexts characterized by high information asymmetry, indirect information about existing firm commitment cues plays a vital screening role by demonstrating the firm’s legitimacy and capability. Subsequently, we develop a tripod framework that integrates the social, market, and strategy dimensions as firm commitment cues that serve as fundamental screening mechanisms to mitigate the adverse effect of misconduct severity on investor reactions. We use a sample of 344 Chinese listed firms that engaged in financial misconduct during 2009–2019 and find that greater misconduct severity results in more negative investor reactions. However, this negative relationship is weakened when the firm demonstrates stronger social and strategy commitments but not stronger market commitment.

The Role of Social Networks in International Trade and Economic Development

In an era of global trade, cultural differences and trade barriers persist, impacting international business transactions among companies. However, research has revealed that individuals within the same social network, regardless of their physical location, experience a mitigation of information asymmetry. This, in turn, facilitates the establishment of robust cross-border business relationships and enhances the efficiency of international trade. This effect is particularly pronounced among immigrants, who often maintain social networks that bridge cultural gaps and foster social connections. Such networks can markedly amplify the volume of trade for businesses. Moreover, these social networks play a pivotal role in facilitating market entry. Sharing a common social network serves as a trust-building mechanism in cross-border trade, enabling enterprises to share transaction risks and decrease the unpredictability of transactions. The study integrates the latest research on the pivotal role of social networks in global business. The findings demonstrate that ethnic networks, such as those formed by Chinese immigrants, significantly enhance trade volumes, particularly in product categories with high information asymmetry. Greater levels of social connectivity within these networks are associated with substantially higher bilateral trade volumes, especially for goods facing significant information friction. Immigrant networks serve not only as economic connections but also as cultural and social conduits crucial for promoting international trade. In conclusion, social networks mitigate information asymmetry and facilitate rapid expansion into overseas markets for businesses. They also optimize supply chain management by monitoring market dynamics and consumer feedback in real time, while clearly identifying market opportunities.

Supply chain vertical common ownership and cost of loans

This study explores how vertical common ownership reduces supply chain risk and influences creditors' decisions, focusing on the cost of loans. Findings reveal that creditors view such firms as less likely to default, evidenced by lower loan spreads. This effect is stronger for suppliers with more relationship-specific investments, weaker bargaining power, higher information asymmetry, and long-term common institutional ownership. Results remain robust through quasi-natural experiments from financial institutions' M&As, supplier-customer pair analyses, etc. We also compare vertical common ownership with the horizontal one and demonstrate its incremental contributions. Moreover, the fraction of customer sales and the institutional investors' share ownership likely influence the likelihood of vertical common ownership, with our results consistently holding under Heckman analysis. Overall, the results suggest that vertical common ownership enhances coordination and monitoring, reducing risks and creditor risk premiums. The findings may offer valuable insights into managing supply chain risks and understanding their financial implications.

The moral masking behavior of management after real earnings management: An analysis of management's integrity commitment

This study examines the link between genuine earnings management and management's integrity commitment using data from A-share listed firms on the Shanghai and Shenzhen stock exchanges (2007–2021). Findings indicate that following genuine earnings management, management tends to emphasize integrity in the MD&A section of annual reports, suggesting moral camouflage in response to negative moral emotions. This behavior is more pronounced with higher information asymmetry between management and investors, amplifying the tendency towards moral camouflage. Further analysis shows that post-earnings management, there is no significant increase in charitable contributions or CSR performance, and agency costs remain high, underscoring a preference for moral camouflage over moral purity. Additionally, management's integrity commitment does not affect analysts' future market valuations or reduce the likelihood of regulatory inquiries. The study also finds that the relationship between earnings management and integrity commitment strengthens under increased moral pressure. This research provides theoretical insights into executive behavior driven by negative moral emotions and offers practical implications for investors, auditors, and regulators.

Social media as an amplifier of insider trading profits

Our study investigates the relationship between stock forum posts and insider trading profitability. Using regression analysis, we find a positive relationship between the number of posts on a firm’s stock forum and insider trading profitability, particularly for sales transactions. A difference-in-differences analysis based on the launch of the mobile app for stock forums further confirms these results. This profit-amplifying effect of stock forum posts is likely due to the pervasive noise on social media, as it weakens following the introduction of regulations aimed at cleaning up the internet’s information environment. Additionally, we observe distinctions in post tone around insider trades, with the profit-amplifying effect more pronounced in firms with high information asymmetry, substantial retail holdings, and less foreign ownership. Overall, our study highlights a potential dark side of social media in amplifying insider trading profits, emphasizing the need for regulatory measures.

Company reputation and dividend payout

PurposeThe purpose of this paper is to examine the association between company reputation and dividend policy.Design/methodology/approachIn this study, sample of 98,809 firm-year observations from 22 countries covering 2005–2016 were used.FindingsFirm reputation concerns are associated with higher propensities to pay dividends and payout ratios. Further, this positive effect is more pronounced for firms with high free cash flows, high information asymmetry and low institutional monitoring. The results are robust to an instrumental variable approach, propensity score matching and the Heckman two-stage correction approach while addressing endogeneity concerns.Practical implicationsThese findings have significant implications for various stakeholders, such as existing and potential investors, managers, policymakers and regulators, by providing insights into the relationship between corporate reputation and firm dividend payout decisions. Corporate reputation is highlighted as crucial for accessing finance, emphasizing the role of national regulators and policymakers in facilitating firms' efforts to improve their reputation. The study highlights the dynamics of corporate reputation and dividend payout, calling for proactive engagement from regulators and policymakers. Crafting policies conducive to reputation-building can enhance firms' financial prospects, indicating the need for strategic interventions at managerial, regulatory and policy levels. Understanding the influence of economic context is crucial for firms to tailor reputation management strategies and optimize funding opportunities in different economic environments.Originality/valueOverall, results suggest that reputation serves as a disciplining mechanism, where firms will pay dividends to maintain their reputations.

Accounting comparability and customer concentration

This study examines the relationship between accounting comparability and customer concentration. Higher accounting comparability enhances customers’ ability to evaluate suppliers’ performance against their industry peers. This allows suppliers to attract more customers, hence reducing their customer concentration. We find a negative association between accounting comparability and customer concentration. This relation is stronger for firms with better profitability, higher information asymmetry, and more innovations. By establishing a link between accounting comparability and customer concentration, our study provides additional evidence about the consequences of accounting comparability and is helpful to both academics and practitioners.

Does banking competition increase corporate labor income share? Evidence from China

This paper investigates the impact of banking competition on corporate labor income share in China. Utilizing hand-collected unique data on bank branches within a certain distance of firms and a large sample of Chinese A-share list firms spanning the period 2000–2022, we find that banking competition significantly boosts corporate labor income share. A 10 percent increase in banking competition, the corporate labor income share increases by 0.06 percent on average. The results remain robust after replacing proxies, changing estimation methods, controlling for other shocks, and addressing endogenous concerns. Easing financing constraints, improving investment efficiency, and enhancing human capital are three essential channels through which banking competition promotes corporate labor income share. We also find that the impact of banking competition on corporate labor income share is more pronounced for firms with higher external financing dependence, higher financing gaps, more investment opportunities, higher governance efficiency, and higher information asymmetry. Our findings highlight the significance of enhancing banking competition to promote income distribution, foster common prosperity, and drive high-quality economic development.

Free Cash Flows and Corporate Buybacks: A Study of Indian Firms

The present research examined the effects of cash flow volatility on the buyback decisions of Indian firms. The sample constitutes 179 Indian companies listed on the Bombay Stock Exchange from 2012-2020. Firms have been divided into two sets, i.e., permanent and volatile cash flow firms. Across these two sets, the study determines the major factors affecting their buyback decisions. The results of ordinary least square regression suggested that when firms have fluctuating cash flows each year, they prefer to opt for repurchases than dividend payments. Further, stock undervaluation is the key determinant of repurchases decisions. Thus, firms with constant cash flows are not highly motivated for buyback decisions. Further, the study explored that larger the size of the firm, lower is the tendency to repurchase shares. Large, manufacturing and mature firms with consistent cash funds are more strongly tended towards repurchases. Correspondingly, such companies engaged in buybacks because of their low market-to-book ratios and high information asymmetry. As cash based firms become more old, their propensity to purchase equity reduces.

Manipulating stock prices based on insider information

Purpose This paper aims to investigate the trading behavior of insider investors before and after information releases, identifying information-based manipulation in the stock market and the characteristics of companies whose stock prices are manipulated. Design/methodology/approach This paper employs logit regression method and an event study approach, utilizing hand-collected data from 2010 to 2022, with information categorized into negative and positive types. Findings The results show no evidence of insider trading or negative information-based manipulation in both high and low transparency firms. However, in highly transparent companies, the Board of Directors (BOD) avoids direct manipulation by using relatives to evade market supervisors. In low transparency companies, both the BOD and family members (FM) exploit positive information to benefit personally by buying shares before releasing favorable news, causing a sharp stock increase, and selling afterward. Continued buying by the BOD and FM also suggests likely positive news announcements. Practical implications The characteristics of information-based manipulation in companies, as provided by this study, help individual investors avoid investing in stocks that are highly susceptible to manipulation. Originality/value Empirical research on information-based manipulation is scarce due to limited secondary data. Our study uses transaction data from insider investors in a frontier market with low transparency and high information asymmetry. This enables us to analyze information-based stock price manipulation. We identify manipulation by comparing insiders' trading behavior with their market information releases, resulting in stock price fluctuations greater than 5%.

An insight into the signaling role of Sharia status: a case from an emerging IPO market

Purpose This study aims to examine the potential of Sharia status as ex ante information to signal the quality of an issuing firm by improving the decision-making process of potential investors when assessing initial public offerings (IPOs) in an environment where information asymmetry is pronounced. Potential investors face challenges in evaluating and determining the true value of IPO issues, which inherently influences their decision-making. Consequently, this results in pronounced price fluctuations in IPO shares, leading to higher underpricing. Design/methodology/approach This study uses a sample of 350 IPOs listed on the Kuala Lumpur Stock Exchange (KLSE) between 2004 and 2021 to examine the signaling role of Sharia-compliance status. A three-model approach is used to ensure that the study's objectives are met. The first model investigates the effect of Sharia status on underpricing to determine whether the main beneficiary of such a signal is the investor or the issuer. The second model examines the effect of Sharia status on investor demand to determine if such a signal influences prospective investors' investment decision-making processes. The third model inspects the effect of Sharia status on investor divergence of beliefs to measure the signal's ability to reduce information asymmetry within the Malaysian IPO market. Findings The Malaysian IPO market relies heavily on the fixed-price mechanism, which exacerbates high information asymmetry, affecting potential investors' behavior, asset price formation and return generation on the first day of listing. The study results indicate that Sharia status does not have any signaling role in the Malaysian IPO market. This is because investors in the Malaysian market are driven by ex ante information that helps unveil relevant information that leads to capital gains. Furthermore, most new issues in the Malaysian IPO market fall under Sharia status, diluting the relevance of such information for prospective investors in determining profitable investments. Practical implications The findings highlight the challenges faced by issuing firms in estimating market demand due to limited premarket insights and the difficulties prospective investors face in identifying the quality of issuing firms. Efforts to provide more information on investor demand can reduce uncertainty and facilitate more informed decision-making. Originality/value This research stands as one of the pioneering efforts to provide an empirical explanation of the potential signaling influence of Sharia status in an emerging IPO market.

Platform-Provided Disclosure on Investor Base and Entrepreneurial Success: Evidence from Crowdfunding

ABSTRACT We employ a sharp regression discontinuity design to identify the causal effects of investor-base disclosure (IB DISCLOSE) on funding outcomes and entrepreneurship success. Since February 2016, Kickstarter has disclosed IB information, namely, backer statistics including geographic locations and previous funding experience of the backers, once the number of backers for a project reaches ten. Exploiting this discontinuity, we show the disclosure increases the likelihood of funding success by 10 percent and the amount of funds pledged by 13 percent. The effect is more pronounced when the project quality is high and for projects with less credible creators, high ex ante uncertainty, high information asymmetry between creators and backers, and high financial costs to backers. We also find IB DISCLOSE increases the likelihood of product delivery. Our study highlights the importance of platform-provided disclosure in improving the efficiency of capital allocation. JEL Classifications: M41; G24; L15; O31; D04.

Signing auditors’ experience gap and audit quality

This study investigates how interactions between signing auditors with different levels of experience affect audit outcomes. Using the unique data from China, we find that a higher experience gap between signing auditors is associated with higher audit quality, as indicated by lower absolute discretionary accruals and a smaller likelihood of restatements. Further analyses suggest that the positive association between signing auditors' experience gap and audit quality is more pronounced for client firms that are more complex, have weaker corporate governance and higher information asymmetry, are audited by smaller audit firms, and are more economically important to auditors. Our results are robust to alternative research designs, alternative measures of auditor experience and audit quality, and other sensitivity tests. We contribute to the literature on auditor experience and audit team diversity with implications for audit firms’ personnel assignment.

Supply-chain finance digitalization and corporate financial fraud: Evidence from China

Recently, supply chain finance (SCF) digitalization, which integrates emerging digital technologies with traditional SCF, has been attracting worldwide attention. While previous studies have highlighted the adoption of SCF digitalization, little is known about how it shapes corporate behaviors. Using a sample of Chinese A-listed firms from 2008 to 2021, this study investigates the relationship between SCF digitalization and corporate financial fraud. Based on the results of the propensity score matching and difference-in-differences approach and mechanism analysis, SCF digitalization is found to inhibit corporate financial fraud by reducing a firm's relational transactions with its suppliers and customers. Additionally, cross-sectional analysis reveals that the governance effect is more pronounced for small- and medium-sized enterprises and for companies with higher information asymmetry, more financial linkages, and lower financial flexibility. Overall, our findings facilitate the understanding of how the digital economy influences corporate behaviors.

The dark side of digital transformation: Evidence from opportunistic insider selling

While the benefits of corporate digital transformation are well-documented, evidence of its dark side is scarce. This study examines the effect of corporate digital transformation on opportunistic insider selling. Using a sample of Chinese A-share listed firms, we find that corporate digital transformation significantly contributes to opportunistic insider selling. Moreover, we find that this effect is particularly pronounced for firms that exhibit high information asymmetry, possess weak corporate governance, or have powerful executives. Further analysis suggests that digital transformation increases the profitability of opportunistic insider selling. Overall, our study sheds light on the adverse consequence of corporate digital transformation.

Audit committee personnel training and stock price crash risk

This study examines whether audit committee personnel training decreases future stock price crash risk. Using a hand-collected Korean sample comprising 2,378 firm-year observations from 2018 to 2022, we find that audit committee personnel training reduces future stock price crash risk by lowering real earnings management and curbing overinvestment. Additionally, our findings are more pronounced for firms with high information reporting opacity, high information asymmetry, audit committee chairs with accounting and financial expertise, and firms audited by high-quality auditors. The findings shed light on the value of training to audit committee personnel.

Multiple large shareholders and audit fees: Demand‐side evidence from China

AbstractThis paper provides evidence on the role of multiple large shareholders (MLSs) in the determination of audit pricing from a new demand‐side perspective, rather than the typical supply‐side perspective. We find that for Chinese A‐share listed firms, the presence of MLS is associated with significantly higher audit fees. The results are robust after we address endogeneity concerns and use auditor choice as an alternative proxy to capture demand for auditing. Further tests show that audit fees increase with the number and relative power of noncontrolling large shareholders. The positive impact of MLS on audit fees is more pronounced for state‐owned enterprises (SOE) than in family‐owned enterprises. Moreover, this positive impact of MLS is more pronounced for SOEs with foreign blockholders and non‐SOEs with independent institutional blockholders. This positive impact is also more pronounced for firms with higher information asymmetry, severe agency problems and higher litigation risk. Overall, our results provide consistent evidence that firms with MLS are likely to demand high‐quality auditing, leading to higher audit fees.