Information Asymmetry Environments Research Articles

Directors with supply chain experience as heterogeneous network pipes: how does it affect M&A efficiency

PurposeThe link between interlocking directors and mergers and acquisitions (M&A) efficiency has been analyzed in an information asymmetry environment. Despite an abundance of evidence highlighting that interlocking directors do contribute to M&A efficiency in an acquirer-target binary relationship, the target is embedded in a complex network of supplier-customer relationships, which implies that the acquirer needs to consider the value of suppliers, distributors and retailers in the target’s supply chain in improving M&A efficiency. Through the lenses of acquirer-target multivariate relationships, this paper aims to examine how directors with supply chain experience (DSCs) act as heterogeneous network pipes to affect M&A efficiency.Design/methodology/approachUsing a sample of 311 A-share listed firms on the Shanghai and Shenzhen stock exchanges in China during 2011–2020, this paper investigates the relationship between DSCs and M&A efficiency by using ordinary least squares (OLS) regression.FindingsThrough empirical research, we verify a negative relationship between DSCs and M&A duration and an inverted U-shaped relationship between both DSCs and M&A performance, revealing the complexity of the relationship between experience and efficiency. Furthermore, drawing on upper echelon theory, the information value of DSCs will be greatly reduced when executives have overconfident psychological characteristics, which are mainly shown to negatively moderate the relationship between DSCs and M&A performance. We also conduct multiple robustness tests and supplemental analyses to illustrate the robustness and boundaries of our findings. Finally, DSCs are likely more important in environments among growth and mature firms as well as high-growth industries.Originality/valueWe break through the assumption that interlocking directors contribute to M&A efficiency in an acquirer-target binary relationship and examine the impact of DSCs on M&A efficiency based on micro-empirical evidence from the value of target-related upstream or downstream industries, which extends the connotation of interlocking directors and enriches the study related to factors influencing M&A efficiency.

A signaling game model for evaluating water allocation competitiveness with information asymmetry environment, case study: Zayandehrud River Basin, Iran

A signaling game model for evaluating water allocation competitiveness with information asymmetry environment, case study: Zayandehrud River Basin, Iran

Financial literacy, financial development, and leverage of small firms

This study examines the relationship between financial literacy and the leverage of small firms, specifically of the legal forms, sole proprietorships, and partnerships. Using a cross-section of 73,302 firms in 22 countries, we find that the leverage of small firms is negatively associated with financial literacy. Further, we explore the role of financial development, bankruptcy and transaction costs, and information asymmetry, in moderating the relationship. We find that the negative relationship is less pronounced in countries with lower financial development, high bankruptcy and transaction costs, and high information asymmetry environments, respectively. We contribute to the understanding of small firms' leverage and the literature on financial literacy, SMEs, finance, and entrepreneurship. This study offers policy implications for economies that promote SMEs for entrepreneurship training and development.

Analysis of e-Commerce Characteristics Based on Edge Algorithm and COX Model

With the rapid development of C2C (consumer to consumer) e-commerce transactions in China, the problem of information asymmetry in C2C e-commerce transactions is becoming more and more obvious. This paper analyzes the specific performance and influence of information asymmetry in C2C e-commerce transactions and then proposes a strategy to eliminate information asymmetry in C2C e-commerce transactions. Based on the perspective of information asymmetry, C2C e-commerce is taken as the research object, and the research methods such as literature analysis method, qualitative analysis method, and case analysis method are comprehensively used to explore the C2C e-commerce supervision problem in China under the information asymmetry environment. The reason and countermeasures. Secondly, it analyzes the e-commerce government supervision theory in detail and studies the definition, content, and principle of e-commerce government supervision, the necessity of e-commerce government supervision, and the main forms of e-commerce government supervision in China. The status of China’s e-commerce supervision is elaborated, including the question of “who is going to supervise,” “who is supervising,” and “how to supervise.” Aiming at the problems of imperfect legal system in China’s e-commerce supervision, lack of cross-departmental coordination mechanism, and difficulty in investigation and evidence collection of e-commerce illegal behavior, we put forward targeted and operational policy recommendations.

Research on Social Co-governance Innovation Model of Food Safety--Based on CAS theory

In the information asymmetry environment, food safety is a major focus of social livelihood, because consumers can not get the information of food production and circulation. Based on the CAS theory, this paper establishes a government-enterprise co-creation model of food safety, which takes the government and the food safety behavior of food enterprises as the main body, and it is found that the pertinence of government policies and the exemplary role of leading enterprises are the core of co-creation of food safety.

Peer Firms in Audit Pricing: Evidence Under High Uncertainty Settings

Drawing on prior studies regarding the use of peers for investment decisions and compensation practices and the recent reports which suggest that firms use peer information for audit pricing, we examine the effect of peer groups on the audit pricing process under high information asymmetry environment. Using observations from the emerging markets of China, we find that peer group information is used in audit pricing with peer groups defined as the Industry, Industry/Region, Industry/Big4, Industry/Size, and Industry/Region/Big4. This is consistent with above complementary theories. We also find evidence that peer group information is more likely to be used by firms from low-technology industries, less developed regions, and firms audited by non-Big 4 CPA firms than those from high-technology industries, more developed regions, and firms audited by Big 4 CPA firms. Also, peer group information is more likely to be used in clients firms with shorter auditor tenure and with lower analyst following compared with their counterparts. Finally, we find that clients with lower audit fees than their peer groups in the previous period are more likely to increase audit fees in the current period. Our results are qualitatively the same regardless of whether we use an overall sample across different industries or for each industry separately. These results are consistent with the peer group literature and also indicate that peer group information is more likely to be used in conditions when information asymmetry is high.

The Effect of Executive Compensation on Credit Default Swap Spread

Investors have been trying to formulate the optimum composition of executives’ compensation which will incentivize the executives to perform better and act in the shareholders’ best interests. This study aims to find empirical evidence about the impact of executive compensation on the default risk with the Credit Default Swap (CDS) spread as the proxy, using panel data to test the research model, which combines the analysis of cross-section and time series data. The study is conducted based on 1,416 observations of 177 U.S. companies from 2008-2015. The data are mainly collected from Datastream, Compustat, CRSP, and the US SEC’s EDGAR database. The current study provides a contribution by suggesting that executives’ compensation will trigger risk-taking behavior. The results of this study reveal, firstly, both equity-based compensation and debt-like compensation induce risk-taking behavior by the executives. Secondly, the correlation between both the form of the compensation and the CDS spread is weakened in a high information asymmetry environment. Lastly, this study finds that a CFO’s compensation has more influence on the CDS spread, compared to the other board executives, but this condition only occurs when the compensation is awarded in the form of debt-like compensation. To improve the generalization of the results, a further study may consider expanding the sample into several countries.

When do firms benefit from affiliated outside directors? Evidence from Korea

AbstractManuscript TypeEmpiricalResearch Question/IssueDirectors can serve different roles: advisors, liaisons, or monitors. Affiliated outside directors have social or business/financial ties to firm executives, are often more trusted than others by the latter, have more knowledge of the firm, give better advice, or liaise more effectively with other organizations. However, they monitor less effectively than other outside directors do. This study theoretically predicts and empirically examines whether affiliated outside directors' contributions to firm value are moderated by corporate conditions: external control threats, uncertainty, government regulation, or information asymmetry.Research Findings/InsightsPanel data analysis shows that among firms that are standalone, have M&A threats, suffer financial distress, face financial uncertainty, or are subject to stricter government regulations, those with more affiliated outside directors—especially those with social ties—have greater firm value. In low information asymmetry environments, firms with more affiliated outside directors have lower firm value. In high information asymmetry environments, however, firms with more independent outside directors have lower firm value. These results remain robust after controlling for endogeneity issues of board composition, outside directors' human capital, social capital, CEO attributes, firm attributes, and industry attributes.Theoretical/Academic ImplicationsThis study extends and links resource dependence theory and agency theory by showing how outside directors with social ties and those with business ties are related to firm value. Furthermore, the value of affiliated outside directors' resources and liaisons differ across corporate conditions, which extends resource dependence theory. Also, effective monitoring by unaffiliated outside directors requires sufficient access to firm information, which extends agency theory.Practitioner/Policy ImplicationsThe relations of different outside directors to firm value across corporate conditions suggest that firms can benefit from considering their corporate conditions when designing the composition of their board of directors.

Corporate Culture and Investment–Cash Flow Sensitivity

Can firms overcome credit constraints with a corporate culture of high integrity? We empirically address this question by studying their investment–cash flow sensitivities. We identify firms with a culture of integrity through textual analysis of public documents in a sample of Chinese listed firms and also through corporate culture statements. Our results show that firms with an integrity-focused culture have lower investment–cash flow sensitivity, even after we address endogeneity concerns. However, we also find that for the culture to reduce the investment–cash flow sensitivity, external stakeholders must be able to verify this culture through a low information asymmetry environment. Overall, our findings show that a corporate culture of high integrity can mitigate a firm’s external transaction costs.

Conservatism, disclosure and the cost of equity capital

This study seeks insights into the economic consequences of accounting conservatism by examining the relation between conservatism and cost of equity capital. Appealing to the analytical and empirical literatures, we posit an inverse relation. Importantly, we also posit that the strength of the relation is conditional on the firm’s information environment, being the strongest for firms with high information asymmetry and the weakest (potentially negligible) for firms with low information asymmetry. Based on a sample of US-listed entities, we find, as predicted, an inverse relation between conservatism and the cost of equity capital, but further, that this relation is diminished for firms with low information asymmetry environments. This evidence indicates that there are economic benefits associated with the adoption of conservative reporting practices and leads us to conclude that conservatism has a positive role in accounting principles and practices, despite its increasing rejection by accounting standard setters.

Corporate Governance and Diversification*

Using 1640 observations of completed acquisitions from 1996 to 2003, we investigate the relation between corporate governance and returns to bidders and targets. We find that the cumulative abnormal returns for acquirers are significantly negative upon announcement of acquisitions for the full sample and for the related and diversifying subsamples. However, we find that diversifying acquisitions, when conducted by firms with a higher percentage of outsiders on the board, improve returns. Furthermore, we separately examine high-technology and non-high-technology firms to test the relation between board characteristics and announcement returns in different information asymmetry environments. We also find that diversifying acquirers with independent boards perform better than those with insider-dominated boards and the results are especially pronounced for high-technology firms. Taken together, the results suggest that firms with better incentive alignment will be more likely to be perceived by the market as stronger performers in acquisitions. In sum, we find that corporate governance plays an important role in determining wealth creation for our sample of acquiring firms.

Corporate Governance and Diversification

In this paper, we investigate the relation between corporate governance and returns to bidders and targets, using 1,640 observations of completed acquisitions from 1996 to 2003. We find that the cumulative abnormal returns for acquirers are significantly negative upon announcement of acquisitions for the full sample and for the related and diversifying sub-samples. However, we find that diversifying acquisitions, when conducted by firms with a higher percentage of outsiders on the board, improve returns. Furthermore, we separately examine high-tech and non high-tech firms to test the relation between board characteristics and announcement returns in different information asymmetry environments. We also find that diversifying acquirers with independent boards perform better than those with insider dominated boards and the results are especially pronounced for high-tech firms. Taken together, the results suggest that firms with better incentive alignment will be more likely to be perceived by the market as stronger performers in acquisitions. In sum, we find that corporate governance plays an important role in determining wealth creation for our sample of acquiring firms.

Information Asymmetry and Corporate Cash Holdings

In this study we analyze the effect of information asymmetry on corporate cash holdings. Using various measures of information asymmetry, we show that companies that operate in higher information asymmetry environments have smaller cash holdings. We continue to find a negative relation between information asymmetry and corporate cash holdings from a battery of sensitivity analyses, including the tests using different regression methods and the difference-in-difference tests employing brokerage-firm merger and closure events. On the whole, our results support the monitoring cost hypothesis of cash holdings over the investment opportunities hypothesis.

Conservatism, Disclosure and the Cost of Equity Capital

This study seeks insights into the economic consequences of accounting conservatism by examining the relation between conservatism and cost of equity capital. Appealing to the analytical and empirical literatures, we posit an inverse relation. Importantly, we also posit that the strength of the relation is conditional on the firm’s information environment, being the strongest for firms with high information asymmetry and the weakest (potentially negligible) for firms with low information asymmetry.Based on a sample of U.S. listed entities, we find, as predicted, an inverse relation between conservatism and the cost of equity capital, but further that this relation is diminished for firms with low information asymmetry environments. This evidence indicates that there are economic benefits associated with the adoption of conservative reporting practices and leads us to conclude that conservatism has a positive role in accounting principles and practices despite its increasing rejection by accounting standard setters.

Informed Lending and the Structure of Loan Syndicates - Evidence from the European Syndicated Loan Market

In this paper, we assess the relative importance of ratings versus stock exchange listings at reducing information asymmetry using a dataset of syndicated loans to public and private firms in the U.K. for the 1996 to 2007 period. We find that the certification effect of ratings is largest for private firms and that syndicates are smallest if firms are opaque (privately held or unrated). Moreover, we find that the marginal effect of being stock exchange listed is insignificant once these firms are rated. Exploiting the heterogeneity among lenders, we find that particularly foreign bank and non-bank investors do not provide capital if firms are unrated. Our paper highlights the information produced by rating agencies as important mechanism by which ratings improve access to capital. Our results also emphasize the importance of syndicate moral hazard on the supply of uninformed capital in this market: bank-borrower relationships significantly increase the loan share syndicated to investors in high information asymmetry environments.

The Incentive and Signaling Effects of Annual Bonus Schemes: Evidence from Firm Innovation

This study investigates whether firm innovation can be systematically traced to the CEO's performance evaluation made by boards of directors. In evaluating CEO performance, the board can (i) assess and evaluate performance on job aspects that are per-se difficult to measure and (ii) signal firm value to outsiders without having to disclose competitively sensitive details. In this paper, I argue that these features of CEO performance evaluation are central to understanding how boards motivate innovation. The first feature increases the effort allocation towards innovation, while the second feature increases the incentive intensity of equity incentives. As a result, I expect that firm innovation is positively related to the presence of board's private measures in evaluating the CEO, and more importantly, positively related to the interaction of private measures and equity incentives. Empirical results are in line with both expectations. Overall, findings suggest that boards can reduce incentive problems associated with equity ownership in high information asymmetry environments by signaling innovation without disclosing competitively sensitive details.

The Strategic Signaling of Capabilities by Service Firms in Different Information Asymmetry Environments

This study investigates how firms in high or low information asymmetry environments obtain performance benefits from their capabilities. Using data obtained from a sample of 234 service firms, the results indicate that service firms in low information asymmetry environments obtain direct performance benefits from the mere possession of capabilities. In high information asymmetry environments, such as professional services, the performance benefits of capabilities only occur when firms use strategic positioning to signal the presence of their resources. Firms in high information asymmetry environments use the focus of their service offering as well as the degree of service customization to indicate the presence of underlying capabilities.