Higher Information Asymmetry Research Articles

Are Banks Really Special? Evidence from a Natural Experiment

Australia’s Kyoto Protocol ratification (KPR) in December 2007 mandates the country to reduce greenhouse gas (GHG) emissions, hence affecting firms in the highest emitting industries. We exploit the KPR as an exogenous increase in environmental risk facing the highest GHG emitters. We find that the stock market reactions to bank loan announcements significantly increase after the KPR for these emitters relative to non-emitters. The effect is stronger for borrowers with higher information asymmetry and financial constraints. The evidence suggests that banks can certify their borrowers’ environmental risk through their loan approvals, which confirms the certification role of banks.

Are banks really special? Evidence from a natural experiment

Australia’s Kyoto Protocol ratification (KPR) in December 2007 mandates the country to reduce greenhouse gas (GHG) emissions, hence affecting firms in the highest emitting industries. We exploit the KPR as an exogenous increase in environmental risk facing the highest GHG emitters. We find that the stock market reactions to bank loan announcements significantly increase after the KPR for these emitters relative to non-emitters. The effect is stronger for borrowers with higher information asymmetry and financial constraints. The evidence suggests that banks can certify their borrowers’ environmental risk through their loan approvals, which confirms the certification role of banks.

A study of performance model development and good governance budgeting

PurposeThe purpose of this study is to empirically examine the influence of politics, culture and regulation on the budgetary slack and its impact on performance. Specifically, the purpose of this study is to analyze the influence of culture, politics and regulation on budgetary slack and performance in local government.Design/methodology/approachStudies to develop model pengangaran good (good governance budgeting). Using the survey method. The total sample is 300 respondents in seven local governments in West Sulawesi. Respondents from the executive and legislative participate in the preparation of budgets in local government. The research instrument in questionnaire is tested using GSCA.FindingsThe third structural coefficient of the relationship is positive, indicating all three positive relationships. That is, the higher political, cultural, regulatory, will result in the higher budgetary slack. Thus, if one wants to reduce the budgetary slack, then one needs to reduce the problems of politics, culture and regulations. Other results obtained (a) significant political, cultural and regulatory effect on performance either directly or indirectly through budgetary slack. The sixth structural coefficient of the relationship is positive, indicating all six positive relationships. That is, the higher political, cultural and regulatory variables will lead to higher performance either directly or indirectly through budgetary slack; (b) information asymmetry and budgetary slack significantly affect performance. The second structural coefficient correlation is positive, indicating both positive relationships. That is, the higher information asymmetry and budgetary slack will result in higher performance; (c) budgeting participation moderating influence budgetary slack variables that are false and strengthen moderation. That is, the higher the value of participation budgeting (M) affects increasing influence through budgetary slack (Y1) on the performance (Y2).Research limitations/implicationsThe results showed that the political, cultural and regulatory variables significantly affect the budgetary slack. The structural coefficient of the relationship of these three variables had positive-marked, indicating that the relationship of all those three was positive. Thus, the higher political, cultural and regulatory variables will result in higher budgetary slack. Political, cultural and regulatory variables significantly affected the performance both directly and indirectly through budgetary slack. Structural coefficient of the relationship of those six had positive-marked, indicating that the relationship of all those six was positive. Thus, the higher political, cultural and regulatory variables will lead to higher performance both directly and indirectly through budgetary slack.Originality/valueThis paper conducts a research on mediation effect of budgetary slack in relationship between politics, culture and regulation toward performance; this research retests the research result from Fisher (2002) about information asymmetry and performance, Rubin (1993) about political, budgetary slack and performance, Scott (2000) about regulatory, budgetary slack and performance, Indriantoro (2000) about mediation of budgetary slack in relationship between politics, culture and regulation toward performance and Mardiasmo (2005) about budgetary slack and performance. No studies have examined this kind of relationship simultaneously. location of study (no previous research for this relationship): local governments in West Sulawesi.

Environmental, Social, and Governance Incidents and Bank Loan Contracts

We investigated how a borrower’s adverse environmental, social, and governance incidents affect bank loan contracts. Using a sample of 2001 publicly traded US firms during the period from 2007 to 2016, we found that loans initiated after the occurrence of a firm’s environmental, social, or governance-related incident have a significantly higher spread and a lower loan size. Our sample contained firms covered by RepRisk, as RepRisk began tracking firms’ environmental, social, and governance-related incidents in January 2007. Further analysis showed that the influence on loan contracts is more pronounced in younger firms, which verifies that environmental, social, and governance-related incidents have significant influence and higher information asymmetry. In addition, a test of the timing of the environmental, social, and governance-related incidents in a year further strengthened our conclusions. Moreover, the impact of environmental, social, and governance-related incidents on loan contracts was also reflected in other non-monetary items, such as the duration of a loan contract, requests for collateral, and the frequency of covenants, as well as the lender structure. This paper adds to the discussion on the economic effects of environmental, social, and governance-related incidents on bank contracts. More broadly, our results contribute to the public policy discussion on the role banks should play in the transition to a low-carbon and sustainable economy.

Undervaluation and non‐financial information: Evidence from voluntary disclosure of CSR news

AbstractIn this paper, we examine whether stock market imperfection plays a role in a firm's decision to release non‐financial information and if so, what the underlying channels are. To address our questions, we web‐scraped corporate social responsibility (CSR) news to form a sample of publicly traded non‐financial US firms from CSRwire and explored exogeneous variation in stock valuation driven by institutional price pressure. Our empirical results show that firms facing stock market undervaluation are more likely than others to release CSR news. This effect is concentrated among firms exhibiting low levels of CSR commitment and low stock price informativeness. Finally, we provide evidence that the stock market reacts positively to CSR news released by undervalued firms and more so for undervalued firms with high information asymmetry.

Informed options trading prior to insider trades

AbstractWe find abnormal volatility spreads in the options market immediately before corporate insider stock trades, suggesting informed options trading prior to insider trades. The informed options trading is more pronounced for large insider trades, firms in more corrupt areas, and insider purchases in firms with high information asymmetry. Furthermore, the abnormal volatility spreads are positively associated with the post‐trade abnormal returns. In the aftermath of the Securities and Exchange Commission's squawk box cases, informed options trading before insider trades mostly disappeared except for a group of insider stock sales related to insider derivatives transactions such as employee stock options exercises.

The Real Effects of Financial Markets on Scientific Disclosure: Evidence From a Quasi-Natural Experiment

While innovation disclosure is essential for cumulative knowledge production and economic growth, evidence on firm incentives to disclose innovation outcomes is lacking. We examine the role of financial markets in firms’ decisions to disseminate scientific research results. We employ a quasi-natural experiment that exploits plausibly exogenous variation in analyst coverage, resulting in higher information asymmetries. We find that firms respond by a quick and enduring increase in scientific publications. We also show that disclosure decisions are shaped by financial constraints and managerial incentives. We discuss important implications, such as potential crowding effects between transparency initiatives and socially desirable innovation disclosure.

Secondary Market Listings in Equity Crowdfunding: The Missing Link?

While equity crowdfunding has grown in prevalence, investors have had very few opportunities to exit their investments. To address this, several equity crowdfunding platforms have started considering developing secondary markets for buying and selling shares. Using detailed data from the world’s first secondary market for equity crowdfunding, we investigate whether committing to list on the secondary market after the fundraising campaign leads to greater investor participation and thus helps entrepreneurs to raise more money during the campaign. We find that in the early days of the secondary market, making a pre-commitment to list attracted more investors and larger investment sums. However, this positive effect disappeared after the first 18 months of secondary market operation, most likely because investors realized the lack of liquidity on the secondary market and thus the fact that secondary markets are currently unlikely to constitute a viable exit route. Our findings offer valuable insights to platforms aiming at launching secondary markets and regulators responsible for validating such initiatives. In particular, equity crowdfunding would benefit greatly from liquid secondary markets, which however are difficult to achieve due to high information asymmetries, price formation difficulties, reputational concerns, and competition effects from the primary market.

The Market Response to Mandatory Disclosure of Payments to Foreign Governments under the Extractive Sector Transparency Measures Act

This paper examines the equity market response to mandated disclosures made according to the Extractive Sector Transparency Measures Act (ESTMA). Using a sample of 1,559 company-year-country filings from 937 extractive firms between 2016 and 2018, we find that ESTMA disclosures are associated with a significantly negative market reaction. We also find that investors react more negatively to ESTMA disclosures from firms with lower perceived transparency, firms that make payments to more corrupt host countries, firms with higher information asymmetry, and firms with disclosures under the Extractive Industries Transparency Initiative (EITI). Consistent with results from prior studies of other transparency measures outside of Canada, ours indicate that the overall impact of ESTMA is negative for an average firm. Thus, we suggest that the costs of increased transparency that firms internalize from the enactment of ESTMA exceed the benefits. There is a global trend in which countries have adopted or plan to adopt transparency measures to combat corruption. These transparency measures differ widely in their approach and scope, therefore, our results provide an important insight to regulators, investors, and civil societies.

Discount, transparency and announcements effects of equity rights offerings: international evidence

Equity rights offerings and their respective announcement effects have been studied extensively in the literature. Our study expands upon these studies and focuses on those announcement effects and the relation between the discount of an equity rights offering and the announcement effect. Previous theoretical and empirical analyses show that firms can signal their quality via the discount in an equity rights offering and demonstrate a negative relation between the discount and the announcement effect. We argue that this link is only relevant in environments where signalling is possible and necessary. These are financial markets with a particularly low level of capital market transparency, i.e. high information asymmetry. We calculate announcement effects for an international sample of equity rights offerings and show that the negative effect of the discount on announcement effects can only be observed in environments with a low capital market transparency. Hence, our study estimates announcement effects across several different countries and is thus among the first to analyse signalling considerations for equity rights offerings in different transparency environments.

Foreign institutional investors, information asymmetries, and asset valuation in emerging markets

This study investigates the effects of information asymmetries and asset valuation model differences (investor heterogeneity) between foreign and domestic investors on their distinct portfolio holdings in an emerging market setting. I argue that information asymmetry and investor heterogeneity views significantly interact in explaining the different asset allocation decisions of foreign and domestic investors. Employing a large dataset from Turkey, the findings suggest that both information asymmetry and investor heterogeneity view play a key role in explaining the investment decisions of different investor groups. Specifically, different from domestic investors, foreign investors are more likely to invest in firms with a higher global market performance which supports the investor heterogeneity view. However, this relationship only holds for firms with high information asymmetries. The difference in valuation models between foreign and domestic investors converge when asymmetric information problems between these investor groups weaken. This study contributes to the international finance literature by providing a new explanation of why foreign and domestic investors invest in different assets.

Lending Relationships Along Ownership Lines: Institutional Cross-Ownership and Bank Loan Contracts

We find that banking relationships built through institutional cross-ownership influence the granting of loans as well as loan contract terms. Specifically, firms newly added to institutional cross-owners’ portfolios are more likely to borrow from banks that previously issued loans to other firms with the same institutional cross-ownership within the previous three years. These related banks also charge lower loan interest spreads than unrelated banks, and this effect is stronger for borrowers with high information asymmetry, low accounting quality, more financial constraints, and with dedicated institutional cross-owners. Both the lending probability and interest spread effects are robust to different fixed effects specifications as well as to a difference-in-differences analysis using the quasi-experimental setting of financial institution mergers. Overall, our study provides new insights on the role of institutional cross-ownership in the formation of lending relationships.

Do employees prefer conservative accounting?

We hypothesize that employees prefer conservative accounting. We test our hypothesis, using the setting of the German law on codetermination. The law mandates half of the board seats to be filled by employee representatives if the firm’s number of domestic employees (DE) exceeds the threshold of 2,000. We exploit the discontinuity around the threshold and document a substantial increase in accounting conservatism, when employees gain meaningful influence on accounting policies through their representation on the board. Additionally, we show that the impact of employee board representation on accounting conservatism concentrates in firms with high risks and firms with high information asymmetry. Our findings have implications for academics, managers, and politicians.

Does Firms’ Equity Financing Benefit Debtholders? Evidence from Private Placements of Equity

We examine how private placements of equity (PPEs) affect debtholder wealth. We find that banks charge higher loan spreads, require more collateral, and impose stricter covenants for firms conducting PPEs. The results are more pronounced for firms without a value-enhancing PPE feature, particularly those with poorer governance and higher information asymmetry. These firms also invest less efficiently and underperform in the post-placement period and realize more negative bond and stock returns around PPE (post-placement M&A) announcement dates. Thus, issuers’ managerial entrenchment problems are the main source of debtholders’ loss in PPEs, and lenders use such information in adjusting lending terms.

Opportunistic CSR Assurance

Companies that have poor corporate social responsibility (CSR) reporting quality despite purchasing external assurance are more likely to be opportunistic greenwashers. Using more than 39,000 firm-year observations from 20 countries we show that such opportunistic companies exhibit their opportunistic behaviour in several ways. They are more likely to engage in real activity-based earnings management and have higher information asymmetry after controlling for the endogeneity of CSR reporting assurance purchase. However, no obvious market failure is documented as we find that investors value the opportunistic companies relatively lower and the indexer is less likely to include them in a sustainable index. Furthermore, opportunistic assurance behaviours are more prominent in weaker investor-protection countries in which we also confirm that external assurance has a weaker effect on improving the reporting quality of these opportunistic companies. The key policy implication is that more regulatory efforts should be put into improving the oversight of the assurance standard and quality.

Information Asymmetry, Individual Investor Attention and Social Media Analysts’ Information Production

This study examines how information asymmetry and individual investor attention affect the information production of self-proclaimed analysts on social media (social media analysts or SMAs thereafter). Due to individual investors’ low sophistication and limited attention, SMAs are more likely to provide research for stocks with higher individual investor attention, but there is no evidence that SMAs follow stocks with higher information asymmetry, even though they are expected to provide more profit opportunities. Higher individual investor attention leads SMAs to issue lower quality stock recommendations. We find no evidence that SMAs who provide higher quality research survive longer on social media.

Credit Availability and Voluntary Disclosures: Evidence from Interstate Bank Branching Deregulation

This study examines whether the increased availability of bank loans affects borrowers’ voluntary disclosures. Exploiting the staggered deregulation of interstate bank branching across states in the U.S., I find that bank-dependent firms decrease their voluntary disclosures following bank branching deregulation. This overall effect is muted for firms with higher information asymmetry in the public capital markets and higher litigation risk. Furthermore, the decline in voluntary disclosures is more pronounced among borrowers with higher proprietary information costs and stronger lending relationships with their lenders. Further analysis reveals that bank-dependent firms that stop issuing earnings guidance after branching deregulation experience decreased liquidity in the equity market. Overall, this paper sheds light on how regulatory changes in the banking sector have externalities on borrowers’ disclosure decisions.

Collective Reputations, Trust Premium, and Corporate Misconduct

We examine the relationship between collective country reputations and foreign stock returns following news of corporate scandals. We find that investors punish not only the scandalous foreign firm but also other firms from the same country of origin, especially those coming from more trustworthy countries. The effect is more salient for firms with more imperfect information as measured by higher information asymmetry, lower reporting quality, and higher bankruptcy risk. Our findings suggest that investors incorporate a trust premium into stock prices based on foreign firms’ country-of-origin. However, they reclaim such a premium when a country’s trustworthiness is compromised by its affinity firm’s misconduct. Overall, we provide novel evidence that collective country reputations affect the pricing of foreign firms listed on the U.S. stock market.

The Pricing of an Experience Good in a Competitive and Opaque Market

This paper explores the price determinants of fine wines in a competitive and opaque market. Intense international competition, high production costs and information asymmetries, result in Swiss wine prices that mostly depend on collective reputation, production techniques, and product positioning. Following an exogenous currency shock, producers have reacted with a 5% price increase. Finally, a reduction in information asymmetries with the arrival of an influential wine expert on the market had a positive price effect on rated wines and producers. These two findings suggest that wine producers have used this situation to review their wines' pricing and positioning.

Related-party transactions and post-earnings announcement drift: Evidence from the Korean stock market

Post-earnings announcement drift (PEAD) is a market anomaly that contradicts the efficient market hypothesis, which assumes that all publicly available information is reflected in security prices. This study uses multivariate regression analysis to examine the effect of disclosing related-party transactions on PEAD. The empirical results show that greater related-party transactions increase the magnitude of PEAD. This positive association is more pronounced in Korean chaebol firms than in non-chaebol firms. The results suggest that investors have difficulty understanding earnings news of chaebol firms involved in related-party transactions due to their unique and complex corporate governance structure. This study contributes to the literature by showing that there is high information asymmetry between firms and outside investors regarding related-party transactions in chaebol firms; as a result, investors underreact to firms’ earnings information.