Higher Levels Of Information Asymmetry Research Articles

Business strategy and stock price crash risk: The mediating role of financial constraints

The global financial crisis increased uncertainty in economic policy. Firms manage challenges through business strategies and financial constraints and deal with crash risk more proactively to overcome these impediments. This paper investigates the mediating role of financial constraints in the association between business strategy and crash risk, and the type of business strategy that influenced crash risk in Egyptian firms from 2014 to 2021. Data were obtained from financial statements and reports available in the Thomson Reuters database. A total of 792 observations were collected, representing 99 Egyptian firms. The statistical techniques employed in the analysis included ordinary least squares, modified least squares, and path analysis. The results indicate that a higher financial constraint ratio increases crash risk and has a mediating effect on business strategy and crash risk. Results show a positive impact of prospector strategy on crash risk using OLS and GLS, in line with the bad news hoarding hypothesis. Further research shows that prospector strategies have a positive effect on financial constraints. Egyptian firms have higher levels of information asymmetry, which leads to adopting a prospector business strategy and exerts a more pronounced positive influence on the likelihood of crash risk. A robustness check confirms the positive effect of financial constraints as a mediator variable on the relationship between prospector business strategy and crash risk.

Board sub-committee effectiveness, director attraction and director attrition: Do nomination and remuneration committees matter?

This study examines whether the effectiveness of board subcommittees is associated with director attrition and the attraction of new directors to boards. Using a sample of firms listed on the Australian Securities Exchange, we find that nomination and remuneration committee effectiveness is inversely associated with director attrition and positively related to new external directors joining boards. The results suggest the contribution of these subcommittees to improve corporate governance by strengthening the board's human capital through recruitment and retention of suitable talent. Furthermore, the influence of subcommittee effectiveness on attrition (attraction) is more pronounced in firms experiencing higher levels of information asymmetry, weaker governance quality and poorer performance. The results are robust to tests with alternative variables, entropy balanced matching, and additional controls. Overall, our findings show that improved governance through effective subcommittees helps maintain and enhance the human capital of boards.

Peeking into Corporate Greenwashing through the Readability of ESG Disclosures

Faced with the widespread issue of greenwashing, there is a pressing need for an effective approach to assess the extent of corporate involvement in such hypocritical practices. This study aims to address this concern by examining the association between corporate ESG disclosures’ readability and greenwashing. We gauge the readability using a modified Fog Index and construct a company’s peer-relative greenwashing score based on data from third-party databases. The empirical analysis reveals a negative relationship between the level of corporate greenwashing and the readability of its ESG disclosures, suggesting that companies whose ESG disclosures are more readable are less likely to engage in greenwashing. This negative relationship is particularly pronounced in companies characterized by higher levels of information asymmetry. However, the relationship is weaker after 2018, when the “Code of Corporate Governance for Listed Companies” was implemented. In conclusion, our research highlights the significance of ESG disclosure readability in effectively conveying and predicting corporate greenwashing practices. This study provides valuable insights for investors seeking to evaluate corporate performance and make well-informed investment decisions.

A configurative analysis investigating how new technology-based firms gain the first financing round

AbstractNew technology-based firms (NTBFs) present high levels of information asymmetry since knowledge base, the intangibility of assets, and appropriability issues are particularly pronounced. Investors experiment with difficulties in evaluating the quality of NTBFs and look into insights representing the venture's promises and outlooks, and NTBFs need to face limited financing opportunities. Therefore, information asymmetries and moral hazards may influence the financing system of NTBFs. Based on the signaling theory, we propose a configurative approach built on five accessible signals (founders’ education and work experiences, property rights, alliances, and size) to identify combinations of signals conducive to the NTBF reaching a first financial round. By adopting a configurative approach through the qualitative comparative analysis, we advance our understanding of the intricate dynamics between NTBFs and investors, shedding light on the complexity and interplay of various factors influencing the financing outcomes.

Examining the challenges of the Russian sharing economy: the institutional and evolutionary approach

This study examines the key features of Russian sharing economy business specialized in food delivery using the institutional and evolutionary approach. Existing business models used by Russian food delivery companies are characterized by a high level of information asymmetry in the employee-employer relationship. This has led to a great deal of tension and resulted in the open conflict between food delivery companies and couriers. This study is a qualitative research initiative based on a series of semi-structured in-depth interviews with the employees of delivery companies. The results obtained enabled us to distinguish between two groups of couriers. While most “part-time” couriers, who work no longer than 4 hours per shift, are satisfied with their labor conditions, there is a widespread opinion among “full-time” delivery workers that they are underpaid and overloaded. Popular institutionalized form of employment that Russian food delivery companies offer for couriers is self-employment. This form of employment has low social guarantees however minimize employers’ expenses on personnel and social contributions. Even though digital platforms position themselves as reliable partners providing employees with the opportunities for flexible working hours and decent pay, in reality couriers become a very vulnerable and precariatized social group without proper social guarantees and future prospects.

ФІНАНСОВА БЕЗПЕКА ВІДНОСИН ІНОЗЕМНОГО ІНВЕСТОРА З УПРАВЛІНСЬКОЮ КОМПАНІЄЮ В ПАРАДИГМІ «АСИМЕТРІЇ ІНФОРМАЦІЇ» ТА «МОРАЛЬНОГО РИЗИКУ»

The article is devoted to scientific analysis and characterization of the foreign investor's (the subsidiary owned by such investor) relations with the management company. The high level of information asymmetry and moral risk in relations between foreign investors and management companies was emphasized. The main advantages and disadvantages of transferring the functions of the executive body to the management company were highlighted (more effective management – on the one hand and higher risks of breaching non-compete or non-disclosure rules, higher expenses – on the other hand). The current state of legislative regulation of the status of the management company was analyzed. It was suggested to enshrine recommendations in legal acts regarding: financial indicators (the size and the form of payment of the share capital, the volume of net assets, indicators of financial stability and sustainability), qualification, skills, experience, and education of employees, premises, technical and software indicators, non-compete and non-disclosure rules, which the management company should meet. Institutional analysis of the agreement on transferring the functions of the executive body to the management company was carried out, main distinctions of this kind of agreement from the agency agreement, the mandate contract, the service agreement, and the property management contract were explained. It was proposed to determine the agreement on transferring the functions of the executive body to the management company as the business-law contract, according to which the legal entity-management company undertakes to provide managerial services for the company, to perform the functions of the executive body, stipulated by the corporate legislation and the charter of the company, is empowered to dispose the property and to make transactions on behalf and in the interests of the company, and shall receive payments for such services from the company. Practical recommendations regarding improvement of legal regulation of relations with the management company were given in order to increase the investment attractiveness of Ukraine.

National or third-party manufacturer? Sourcing strategy of a dominant platform: Signaling game's perspective

The dominant online platforms (e.g., Amazon and JD) in practice have adopted a strategy of introducing their own store brands as a means to engage in competition with national brands inside consumer markets. However, whether to source store brands from national or third-party manufacturers is still a dilemma for platforms. This paper investigates the online platform's optimal sourcing decision for the store brand when the platform possesses private information about the degree of consumer acceptance of the store brand. This paper develops a signaling game in which the better-informed dominant-platform may reveal its private information through profit margins and highlight the signaling effect of price on the sourcing strategy. Due to the signaling cost, we find that asymmetric information has the potential to inhibit the platform from cooperating with the national manufacturer to produce the store brand. Furthermore, the existence of information asymmetry reduces the profit of the platform with superior information, while simultaneously boosting the profit of the less-informed national manufacturer. Interestingly, our findings reveal that under an asymmetric information setting, a higher level of information asymmetry might negatively impact the platform, which contrasts with the situation when information is symmetric. Consequently, the platform gains more advantages by cooperating with a third-party manufacturer with a moderate level of information asymmetry.

Let others know who your friends are: The effect of collaborator disclosure on crowdfunding performance

AbstractOur analysis of 141,848 campaigns on the Kickstarter crowdfunding platform suggests that collaborator disclosure has a substantial positive impact on crowdfunding performance. This finding is consistently supported by a series of robustness tests. Collaborator disclosure alleviates backers' concerns about campaign risk, the competence of the fundraiser, and the fundraiser's lack of experience. Our findings highlight the significance of disclosing information about collaborators in financial markets with high levels of information asymmetry. In addition, our research adds to the existing literature on voluntary information disclosure and its ability to alleviate market frictions.

Geopolitical uncertainty and the cost of debt financing: the moderating role of information asymmetry

PurposeThis paper aims to study the impact of geopolitical uncertainty on corporate cost of debt and the moderating role of information asymmetry between creditors and borrowing firms.Design/methodology/approachThis study uses 5,223 firm-quarter observations on German-listed firms spanning 2010:Q1–2021:Q4. This study regresses the cost of debt financing on the geopolitical risk, accounting quality and other control variables. Information asymmetry is measured using the performance-matched Jones-model discretionary accrual and the stock bid-ask spread. It uses interaction terms to check if information asymmetry moderates the impact of geopolitical uncertainty on the cost of debts and control for the moderating role of business risk. For the sake of robustness check, it uses long-term cost of debt and bond spread as alternative dependent variables. In addition, this study executes instrumental variables regression and propension score matching to control for potential endogeneity problems.FindingsEstimation results show that geopolitical uncertainty exerts a positive impact on the cost of debt. This impact is found to be more important on the cost of long-term debts. Information asymmetry is found to exacerbate the positive impact of geopolitical risk on the cost of debt. These results are robust to the change of the dependent variable and to the mitigation of potential endogeneity. At high levels of information asymmetry, this impact is more important for firms belonging to “Transportation”, “Automobiles and auto parts”, “Chemicals”, “Industrial and commercial services”, “Software and IT services” and “Industrial goods” business sectors.Research limitations/implicationsGeopolitical uncertainty should be seriously considered when setting strategies for corporate financial management in Germany and similar economies that are directly exposed to geopolitical risks. Corporate managers should design a comprehensive set of corporate policies to improve their transparency and accountability during increasing uncertainty. Policymakers are required to implement innovative monetary and fiscal policies that take into consideration the heterogeneous impact of geopolitical uncertainty and information transparency in order to contain their incidence on German business sectors.Originality/valueDespite its relevance to corporate financing conditions, little is known about the impact of geopolitical uncertainty on the cost of debt financing. To the best of the authors’ knowledge, there is still no empirical evidence on how information asymmetry between creditors and borrowing firms shapes the impact of geopolitical uncertainty on the cost of debt. This paper tries to fill this gap by interacting two measures of information asymmetry with geopolitical uncertainty. In contrast with previous studies, this study shows that the impact of geopolitical uncertainty on the cost of debt is non-linear and heterogeneous. The results show that the impact of geopolitical uncertainty does not exert the same impact on the cost of debt instruments with different maturities. This impact is found to be heterogeneous across business sectors and to depend on the level of information asymmetry.

Analyst following and greenwashing decision

This study identifies analyst following as a determinant of corporate greenwashing decisions. Our study reveals that analyst following can effectively mitigate the extent of company greenwashing, as analysts can help reduce information asymmetry and play a crucial role in supervision. Moreover, our findings are stronger in samples characterized by high levels of information asymmetry and weak corporate governance environment. Overall, the results are consistent with the view that analysts play an important role in enterprise behavior.

Information asymmetry, corporate governance, and IPO underpricing: Evidence in Indonesia

This paper analyzes the relationships between information asymmetry, corporate governance, and IPO underpricing in the Indonesian IPO market. Previous studies on underpricing IPO have shown mixed results, offering several interesting research gaps to explore, especially in emerging markets. Accordingly, the purpose of the research is to examine further whether information asymmetry and corporate governance are the causes of IPO underpricing. A purposive technique is used, and 318 samples of IPOs are selected from 2010 to 2020 on the Indonesian Stock Exchange (IDX). Next, a multiple regression model is developed and tested using the EViews 9 software. Our evidence shows that underwriter reputation negatively affects IPO underpricing, indicating a high level of information asymmetry in the Indonesian IPO market. Further, our evidence reveals that board size and number of employees negatively affect IPO underpricing. Meanwhile, manager and family ownership exhibit insignificant results due to the pyramidal ownership structure. Finally, we also find that reputable underwriters charge higher underwriting fees than non-reputable ones. In general, our study demonstrates that hiring a reputable underwriter and implementing good corporate governance practices can minimize underpricing during the IPO.

The spillover effect of corporate frauds and stock price crash risk

This paper examines the spillover effect of corporate frauds on interlocked firms that share at least one director with the fraudulent firms. We document a reduction of stock price crash risk of interlocked firms following the frauds. Our findings imply that the spillover effect is mainly motivated by the experiences that interlocked directors learned during frauds. Furthermore, we show that frauds have a stronger effect on the stock price crash risk when interlocked firms are exposed to higher levels of information asymmetry and industry-level competition. We find no evidence that the busyness of the interlocked directors affects the spillover effect.

A rent‐limiting design of professional self‐regulation

AbstractWe consider a government that purchases a public good or a private good for public consumption from a heterogenous group of professionals (such as scientists, doctors, or lawyers) in an environment characterized by an extremely high level of information asymmetry. Specifically, we assume that the government needs information from a self‐regulatory organization (SRO) of agents (such as a research council, a medical board, or a bar association) to draft the contract. We show that the government information disadvantage is minimized when the SRO is dictatorial, that is, when it follows the preferences of the efficient agents.

Stakeholder orientation and trade credit: Evidence from a natural experiment

Using the enactment of constituency statutes, which encourage corporate directors and officers to consider stakeholders’ interests when making business decisions, as a quasi-natural experiment, we examine the impact of stakeholder orientation on corporate trade credit. We employ a difference-in-differences research design and find that an increase in stakeholder orientation following the introduction of constituency statutes leads to a higher level of trade credit usage. The findings remain robust across a series of sensitivity tests. We also find that the treatment effect is more pronounced for firms with greater conflicts of interest between shareholders and stakeholders, firms with higher level of information asymmetry and lower trustiness, firms are more financially constrained and have greater liquidity needs, and firms with more market power. Overall, our findings support the view that stakeholder orientation can have a causal effect on trade credit.

The power of the business media: Evidence from firm‐level productivity

AbstractWe examine the impact of media coverage on firm‐level productivity and find that firms with higher media coverage are associated with higher productivity. Using the launch of Barron's Online as a quasi‐shock to media coverage, we document that this relationship is causal. Further exploration shows that the positive media–productivity relationship is stronger for firms with weaker governance mechanisms and for those with higher levels of information asymmetry. We also identify an increase in reputational and career concerns and a reduction in managerial shirking as channels through which media coverage affects firm‐level productivity. The results are robust to alternative explanations and endogeneity concerns. Overall, our findings suggest that media coverage reduces managerial opportunism, and thus enhances resource deployment decisions.

How do CEOs make investment decisions in their early years of tenure? Evidence from investment efficiency

AbstractCareer concerns are escalated during the early years of a CEO's tenure as the market is uncertain about the new CEO's ability. This study examines whether such increased career concerns induce investment inefficiency during the early years of a CEO's tenure in US firms. I find that underinvestment happens in the early years and that the underinvestment problem is most evident when the new CEO is externally appointed and has the low managerial ability. Additional analyses show that the underinvestment problems are more pronounced when firms have a high level of information asymmetry and low financial reporting quality.

Political sentiment and corporate social responsibility

This paper examines the association between firm-level political sentiment and corporate social responsibility (CSR). Drawing inferences from signaling and resource-based theory, we posit a positive relationship between political sentiment and CSR. Using 23,160 firm-year observations of US public firms between 2002 and 2018 as our sample, we find empirical support for our prediction. In addition, the positive relationship between political sentiment and CSR is driven by the environment, community relations, employee relations, and diversity dimensions of CSR activities. We find consistent evidence when we measure CSR using some ‘real effect’ variables. Our cross-sectional analyses reveal that the positive association between political sentiment and CSR is more evident for firms that have a high level of information asymmetry and firms that are large, mature, and active in political lobbying. Our findings remain robust to a batch of sensitivity and endogeneity tests. Overall, our findings advance the literature by highlighting the interplay between politics and firms in an ever-changing political environment.

Insider Trading, Stock Volatility, and Market Liquidity in the Korean Capital Market

Abstract While the positive and negative effects of insider trading have been discussed in the each firm levels, there is little evidence for the effects of insider trading on financial markets. This paper aims to provide empirical evidence for the effects of insider trading in the capital market. This study examines the association between insider trading and information asymmetry in firms with certain information environments. If capital market regulation for insider trading is effective and companies are well-governed, the positive rather than negative effects of insider trading in the capital market will be enhanced. The empirical results indicate that insider selling (buying) in firms with high ratios of foreign share ownership is associated with a decrease in stock volatility (market liquidity). The results in this paper enables policy makers and practitioners to understand the impact of corporate insider trading on outsiders in the capital market. Our findings may also help to reform regulation of insider trading as it is applied in real business environments, especially in firms with high levels of information asymmetry.

A Dilemma of Self-interest vs. Ethical Responsibilities in Political Insider Trading.

Political insider trading has brought substantial attention to ethical considerations in the academic literature. While the Stop Trading on Congressional Knowledge (STOCK) Act prohibits members of Congress and their staff from leveraging non-public information to make investment decisions, political insider trading still prevails. We discuss political ethics and social contract theory to re-engage the debate on whether political insider trading is unethical and raises the issues of conflict of interest and social distrust. Empirically, using a novel measure of information risk, we find that senator trades are associated with substantially high levels of information asymmetry. Moreover, based on inside political information, senators earn significant market-adjusted returns (4.9% over 3 months). Thus, our results do not support the prediction made by social contract theory and thereby provide a potential resolution to the ongoing debate on banning stock trading for members of Congress.

The choice of flotation methods: Evidence from Chinese seasoned equity offerings

Using a comprehensive sample of Chinese seasoned equity offerings, we compare three major equity flotation methods employed by listed firms in China: rights issues, public offerings, and private placements. The dominant flotation method changed significantly around 2005. We examine the valuation effects of the three methods before and after 2005 and identify the determinants affecting the choice of flotation method. Our results support the information asymmetry hypothesis in that firms with high levels of information asymmetry tend to choose private placements and avoid either public offerings or rights issues. Ownership structure does not seem to be a key factor in determining the selection of flotation method. Profitability requirements of refinancing prevent many listed firms from raising additional capital externally. The removal of profitability requirements for private placements in 2006 boosts the popularity of private placements and explains the shift from rights issues to private placements to some extent.