Improved Information Environment Research Articles

Can a not-for-profit minority institutional investor affect corporate tax avoidance? Evidence from China

ABSTRACT We investigate the impact of the China Securities Investor Service Center (CSISC), a not-for-profit minority institutional investor, on corporate tax avoidance. Employing a difference-in-differences (DID) model based on a sample of Chinese listed companies during 2014–2017, we find that CSISC shareholding reduces corporate tax avoidance. We check this finding’s robustness using alternative measures of tax avoidance, alternative sampling, placebo tests, and parallel trend analysis, and our results still hold. In addition, we find the CSISC’s negative impact on corporate tax avoidance is more pronounced in state-owned enterprises (SOEs), firms with worse internal and external corporate governance, and regions with stricter tax enforcement. Further analyses reveal that the improved information environment is a potential channel through which the CSISC inhibits corporate tax avoidance. This paper enriches the literature on the impact of minority shareholder protection mechanism and the determinants of corporate tax avoidance.

Tech-Enabled Financial Data Access, Retail Investors, and Gambling-Like Behavior in the Stock Market

Advancements in technology have reduced information acquisition costs, creating an improved information environment for retail investors. Specifically, new technologies, such as application programming interface (API), deliver high-volume, institutional-like raw data directly to Main Street investors. Although greater availability of information can be beneficial, it may also exacerbate retail investors’ existing trading deficiencies. Exploiting the sudden shutdown of Yahoo! Finance API, the largest free API for retail investors, this study examines how access to tech-enabled raw financial data affects retail investment. We find that retail trading volumes in stocks favored by active retail investors dropped by 8.6%–10.5% within one month of the API shutdown. The remaining retail trades collectively became more predictive of future returns, suggesting less gambling-like behavior after the API shutdown. Moreover, our randomized controlled experiment affirms the underlying mechanism: tech-enabled access to high-volume historical price data increases individuals’ overconfidence, which further leads them to engage in excessive trading. The study reveals an unintended consequence of technology-led, wider data access for retail investors. This paper was accepted by D. J. Wu, information systems. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01379 .

Firm visibility, liquidity, and valuation for thinly traded assets

We employ a regression discontinuity design to study how a market division experiment affects stock liquidity and firm valuation in an illiquid market. We document that an increase in firm visibility can substantially improve a firm's liquidity (measured by trading immediacy) and increase valuation by 28.4% for thinly traded assets. We also find some evidence that an improved information environment may contribute to enhanced liquidity and valuation.

Can online interactions help level the playing field for firms in different regions?

PurposeThis paper examines whether technological changes that promote communications between investors and managers help bridge the gap in the cost of equity capital among firms in different regions.Design/methodology/approachWe use the online interaction platforms of listed firms in China and utilize brokerage presence (BP) to capture the geographic distribution of financial factors. We explore whether online interactions would reduce the cost of equity to a greater extent for firms located in low brokerage presence regions (hereafter “low-BP firms”) than those in high brokerage presence regions (hereafter “high-BP firms”).FindingsWe find low-BP firms benefit more from an improved information environment created by online interactions. We also find that posts about low-BP firms are more value-relevant and useful in processing corporate disclosures. Further, a higher number of interactions significantly enhances more informational efficiency for low-BP firms, and the effect of reducing the gap in financing costs is more pronounced when corporate information is complex.Originality/valueWe conclude that online interactions alleviate geography-induced information frictions and create a relatively level playing field for firms located in all regions.

Dynamic analysis of digitally-driven technology upgrades and environments based on DAG-SVAR models-a case study of the United States of America

Abstract Digitalization is a fundamentally disruptive force triggered by the fourth Industrial Revolution and the Internet of Things, driving technology upgrades, so what impact does digitalization have on the environment? In this paper, DAG-SVAR model was constructed to verify it. Through impulse response analysis, it was found that digitization drives technological upgrades, and environmental pollution is reduced through intelligent production, improved information environment, and ameliorated governance level. This paper suggests that, on the one hand, the technology upgrade is the key to digital empowerment in new fields and new spaces. Enterprises need to constantly explore diversified application scenarios, help the digital and intelligent transformation of energy, transportation, manufacturing and other industries, and greatly promote the integration and interaction of technology and various fields and sustainable development; on the other hand, it is necessary to strengthen digital ecological governance, promote the interconnection of everything, human-computer interaction, and the integration of space and land, so that information resources can fully flow, to create a digital green ecology.

CEO Network Connections and the Timeliness of Financial Reporting

SYNOPSIS We investigate the effects of CEO networks on the timeliness of financial reporting. Using a sample of over 2,000 firms for the period 2004–2017, we find that firms led by well-connected CEOs have lower earnings announcement lag, audit lag, and filing (10-K) lag. This timeliness is not at the expense of financial reporting quality and accuracy. These effects are stronger when firms have strong corporate governance and no material internal control weaknesses. Interestingly, the effect of CEO connectedness on timeliness is significant regardless of the intensity of demand for information from institutional investors and analysts but is stronger when information demand is lower. Overall, these findings suggest that improved information environment around well-connected CEOs leads to timely dissemination of high-quality information to the market. JEL Classifications: D85; M42.

Exploring the acquisition behavior of penny stock firms

We document that penny stock firms' acquisition likelihood increases with firm size, sales growth, free cash flow, stock price volatility, and run-up, but decreases with leverage, the number of years since IPO, and Tobin's Q. These findings are validated in a stepwise regression framework and are robust to alternative model specifications. Penny stock acquirers prefer public targets and are more (less) likely to use stocks (cash) as the payment method. We also find that acquisitions announcement returns are higher for penny stock firms than for non-penny stock firms, even after accounting for firm- and deal-characteristics. Further analyses indicate that the increase in announcement returns is driven by the firm's improved information environment. Overall, we document that penny stock firms are significant players in the market for corporate control.

How does privatization affect cash dividends? Quasi-experimental evidence from China

Against the backdrop of privatization experienced by Chinese state-owned enterprises (SOEs) in recent years, this study investigates how privatized firms change cash dividend payments. Using a difference-in-differences (DiD) research design, we find an increase in cash dividends following privatization. Additional analyses reveal two channels underlying the increase in dividend payouts – that is, reduced insider tunnelling and agency problems associated with cash holding, and improved information environment after privatization. Our findings enrich the literature on privatization by providing new insights into the underlying mechanisms explaining the increased cash dividends from the agency theory and information environment perspectives.

Enhanced management information disclosure responsibilities and corporate risk-taking: Evidence from the accountability system for errors in China

Enhancing management's responsibility for information disclosure can improve a firm's risk-taking by improving its resource allocation efficiency, but it can also reduce firm risk-taking by increasing managers' risk aversion. After the regulation change from the China Securities Regulatory Commission to require the listed companies to establish an accountability system for material errors in information disclosure of annual reports (hereinafter referred to as the “accountability system for errors”) in late 2009, the risk of misreporting became substantially higher. This paper explores how the accountability system for errors with strengthened management's responsibility for information disclosure affects corporate risk-taking. We find that the accountability system for errors significantly reduces corporate risk-taking, especially idiosyncratic risk, and the impact is greater in firms with short-term CEO tenure and high-tech firms. The improved information environment and increased market pressure are the mechanisms by which the accountability system for errors reduces corporate risk-taking. Further research shows that after the policy change, firms reduce R&D expenditures and output and are more likely to diversify risk through fixed asset investment and diversified mergers and acquisitions. After establishing the accountability system for errors, the higher level of risk-taking will lead to lower CEO compensation and a higher probability of CEO dismissal. This paper enriches the research on corporate governance reform related to strengthening management responsibility. Our research also provides references and guidance for relevant regulatory authorities and listed companies in emerging markets to improve their corporate governance.

Institutional cross‐ownership and trade credit: Evidence from China

AbstractResearch Question/IssueRelying on enhanced market power and improved information environment associated with institutional cross‐ownership, this paper examines the relation between institutional cross‐ownership and trade credit in China.Research Findings/InsightsListed firms with cross‐ownership can obtain more trade credit. The main conclusion is robust when we consider endogeneity problems, alternative measures of institutional cross‐ownership, and the effect of a financial crisis. Further, we perform several tests to examine the influencing mechanisms, confirming that the positive relation between institutional cross‐ownership and trade credit is more pronounced for listed firms in more competitive industries, or with poorer information environment. Further analysis also finds that the positive effect of institutional cross‐ownership on trade credit is more prominent for listed firms with fewer bank loans.Theoretical/Academic ImplicationsThis paper emphasizes information sharing and cooperation among listed firms with institutional cross‐ownership and argues that the information improvement effect is a relatively more important mechanism in affecting listed firms' decisions.Practitioner/Policy ImplicationsChina's market‐oriented reform is in progress and shows some weaknesses in corporate governance and investor protection. The research focusing on institutional cross‐ownership can provide useful suggestions for policy makers on how to improve corporate governance and construct efficient capital markets.

Does audit regulation improve the underlying information used by managers? Evidence from PCAOB inspection access and management forecast accuracy

Survey evidence and academic research raise the possibility that audit regulation can impact not only the information contained in external financial reports but also the internal information used by management. We investigate this possibility by examining the improvement in management forecast accuracy around initiation of the Public Company Accounting Oversight Board's (PCAOB) international inspection program. Consistent with managers having improved information, we find that managers issue more accurate forecasts following PCAOB inspection access. Multiple additional analyses support that an improved information environment is the mechanism underlying our results, and this effect is distinct from, and incremental to, any effects of PCAOB inspection on external reporting quality. Our study provides evidence that audit regulation benefits an important internal stakeholder—managers.

Do analysts become better forecasters over time Evidence from India

There are conflicting studies in literature about how the analyst forecast bias, which can be driven by various factors, have trended over time. In this context, we study analyst forecasts in India over the past two decades (1998-2018), as well as before and after the global financial crisis (GFC) in 2008-2009, to find out whether the forecasts have actually become less biased and more accurate over time as the stock coverage and market liquidity has improved. In our initial tests, we find that analyst forecast accuracy has indeed improved over time/after GFC in India, as expected, as the markets have become more mature and efficient. However, when we control for the market turnover, representing the information environment as an additional factor, we find that the underlying bias has actually increased over time. Our results show that the improvement in forecast accuracy of analysts in India over the past two decades is mainly due to the improved information environment.

Quarterly earnings thresholds: Making the case for prior quarter earnings

AbstractWe provide evidence that the prior quarter earnings number is an important and informative benchmark that is relatively unexplored in the accounting literature. Our analyses suggest that managers appear to avoid negative earnings changes relative to the prior quarter. Moreover, we find that even after controlling for the information contained in other frequently used benchmarks (i.e., analysts’ forecasts and earnings from the same quarter of the prior year), changes over the prior quarter's earnings are associated with stock returns. We find that this result is stronger post‐Regulation FD and XBRL, perhaps as a result of the improved information environment. We also find that the informativeness of prior quarter earnings is greater for firms with less volatile earnings and that meeting‐or‐beating prior quarter earnings are associated with future performance.

Stock market liberalisation and corporate cash holdings: evidence from China

AbstractUsing China’s staggered Mainland–Hong Kong Stock Connect programs (hereafter, Connect programs) as quasi‐natural experiments, we examine the impact of stock market liberalisation on corporate cash holdings. We find that the average cash holdings of the affected Chinese A‐share listed firms decreased significantly after the launch of the Connect programs. Further tests show that the relaxed financial constraints and the improved information environment are two plausible channels that allow stock market liberalisation to reduce corporate cash holdings. Overall, we offer original evidence showing how stock market liberalisation in emerging economies affects firms’ liquidity management decisions.

Information Shock and Dividend Policy in Family-controlled Firms: Evidence from Korea

ABSTRACT This paper aims to investigate whether the International Financial Reporting Standards (IFRS) used as an exogenous information shock relates to a firm’s dividend policy as a result of the improved information environment in the emerging Korean market. More specifically, utilizing a large sample of KOSPI-listed firms over the period 2000–2018, we examine whether the propensity and the level of dividend payments around the Korean IFRS (K-IFRS) adoption have changed and further how the family involvement affects such association. Our results show that firms tend to decrease the propensity and the level of dividend payments after the mandatory K-IFRS adoption. Moreover, we find that family-controlled firms have a significantly positive association with dividend payouts after the K-IFRS adoption. Our evidence can be shared with other emerging markets, where prevailing family firms have the characteristics of concentrated ownership and strong control power in an immature market with weak legal protection for outside shareholders.

Digital inequalities in health information seeking behaviors and experiences in the age of web 2.0: A population-based study in Hong Kong.

Inequalities in health information seeking behaviors (HISBs) using mass media and internet websites (web 1.0) are well documented. Little is known about web 2.0 such as social networking sites (SNS) and instant messaging (IM) and experiences of HISBs. We surveyed representative Hong Kong Chinese adults (N = 10143, 54.9% female; 72.3% aged 25-64 years) on frequency of HISBs using traditional sources, internet websites, SNS (e.g., Facebook, Twitter), and IM (e.g., WhatsApp, WeChat) and experiences measured using Information Seeking Experience Scale. Adjusted prevalence ratios (aPRs) for HISBs and experiences by sociodemographic and health-related characteristics were yielded using multivariable Poisson regression with robust variance estimators. aPRs for experiences by HISBs using internet websites, SNS, and IM adjusting for sociodemographic and health-related characteristics were also yielded. Being female, higher educational attainment, not smoking, and being physically active were associated with HISBs using any source (all P<0.05). Older age had decreased aPRs for HISBs using traditional sources (P for trend = 0.03), internet websites (P for trend<0.001), and SNS (P for trend<0.001) but not for IM (aged 45-64 years: aPR = 1.48, 95% CI 1.07, 2.03). Lower educational attainment and income were associated with negative experiences including feelings of effort and difficulties in understanding the information (all P for trend<0.05). Older age had increased aPRs for difficulties in understanding the information (P for trend = 0.003). Compared with internet websites, HISBs using IM was associated with feelings of frustration (aPR = 1.39, 95% CI 1.08, 1.79), difficulties in understanding the information (aPR = 1.36, 95% CI 1.12, 1.65), and quality concern (aPR = 1.20, 95% CI 1.08, 1.32). We identified correlates of web-based health information seeking and experiences in Hong Kong Chinese adults. Providing greater access to and improved information environment of web 2.0 to the target groups may help address digital inequalities.

Would an Improved Information Environment of a Less Regulated OTC Market Benefit Blue-Chip Foreign Firms? Evidence from the OTCQX International Market

ABSTRACT This study examines whether an improved information environment in the OTCQX International market (hereafter QX market) benefits blue-chip foreign private issuers (FPIs). We find that around 600 FPIs traded their stocks in the QX market during 2007–2016, and they are financially better than their home-country counterparts. We also find approximately 6 percent abnormal return around the cross-listing days. Moreover, FPIs with higher financial reporting transparency (i.e., lower earnings smoothness and preparing financial statements in accordance with International Financial Reporting Standards) experience more pronounced abnormal returns and liquidity improvement around cross-listing. Further analysis shows the market premium of cross-listing on the QX market is not attributed to the bonding effect. Our results highlight the importance of the information environment of a less regulated OTC market in benefiting large and established FPIs, which should be of interest to regulators, investors, and foreign firms intended to access less regulated U.S. markets.

CEO Network Connections and Audit Timeliness

The study examines the association between CEO’s network connections and audit timeliness. Based on extant research, we hypothesize that well-connected CEOs are associated with reduced audit lag. Using a sample of over 2000 firms for the period 2004 to 2017, we find that, ceteris paribus, firms with well-connected CEOs are associated with reduced audit lag. We also find firms led by more connected CEOs have better financial reporting quality and pay higher auditing fees for increased audit efforts. In addition, well-connected CEO firms release 10-K reports in a timelier manner. These findings suggest that improved information environment around well-connected CEOs lead to the timely dissemination of high-quality financial information to market participants.

Voluntary Adopters of Integrated Reporting – Evidence on Forecast Accuracy and Firm Value

AbstractThis study investigates how integrated reporting (IR) creates value for investors. It examines how providers of financial capital benefit from an improved firm information environment provided by IR. Specifically, this study investigates the effect of voluntary IR disclosure on analyst earnings forecast accuracy as well as on firm value. To do so, we use an international sample of 167 listed companies that voluntarily publish an integrated report. Our analysis shows no significant effect of a voluntary IR publication on analyst earnings forecast accuracy and no significant effect on firm value. We thus do not find evidence for the fulfillment of IR's promises regarding improved information environment and value creation of voluntary adopters. We conclude that such companies might already have a relatively high level of transparency leading to an absent additional effect of IR disclosure. Positive effects of IR appear to be more relevant in environments where IR is mandatory.

Credit Default Swaps and the Cost of Capital

This study uses the universe of US public firms to examine the impact of credit default swap (CDS) trading on a firm’s cost of capital during the period 2001–2018. Our results robustly show that the inception of CDSs causes a significant reduction in a firm’s weighted average cost of capital (WACC). We also find an increase in the number of analysts who recommend buying CDS firms’ stocks post-CDS trading, suggesting an improvement in the firms’ information environment. Further analyses reveal that highly levered firms tend to reduce their debt weight, while firms with low leverage increase their usage of debt. In equilibrium, we find a marginally decreased net debt issuance post-CDS trading. Moreover, CDS referenced firms adjust their debt placement by using more arm-length debts, while they simultaneously decrease the usage of revolving credits and term loans from banks. The change in capital financing choices may be ascribed to the improved information environment and reflects the fact that CDS trading increases debt renegotiation costs and simultaneously reduces capital supply side frictions.