Information Processing Costs Research Articles

XBRL extensions and cost of equity capital in Chinese firms: a natural experiment

ABSTRACT This study investigates whether XBRL (eXtensible Business Reporting Language) extensions affect cost of equity capital in Chinese firms during the historical sample period of 2015–2016. We find that the additional information in XBRL extensions is positively associated with cost of equity capital in Chinese firms. These findings suggest that the excess information in XBRL extensions reduces the reliability and comparability of financial reporting, leading to an increase in information processing cost and exacerbating the quality of information environment in Chinese capital market. We also find that the positive association between XBRL extensions and cost of capital is stronger in the firms with higher information asymmetry of lower institutional ownership and lower analyst coverage. Furthermore, XBRL extensions associated with specific financial statement items play a significant role in raising cost of equity capital. Our findings indicate that the redundancy of information in XBRL extensions complicates information processing for financial statement users, thus adding value to the XBRL standard makers.

Do Information Processing Costs Matter to Regulators? Evidence from U.S. Mortgage Companies’ Supervision

ABSTRACT We examine the impact of reducing information processing costs on U.S. state regulators who supervise mortgage companies. State regulators traditionally disclosed enforcement actions only on their individual websites. A centralized repository, introduced in 2012, assembled enforcement records across states in one place, reducing a regulator’s cost to learn about enforcements in other states. Using a difference-in-differences design, we find that enforcement records posted on the centralized repository significantly increase the probability of subsequent enforcement actions against the same firm in other states. This suggests that reducing information processing costs helps state regulators identify companies engaging in misconduct. This effect is stronger for records from state websites where information is harder to process and for state regulators with more limited resources. Last, we observe that sanctioned lenders reduce the credit supply in other states after their enforcement records in one state are posted on the centralized repository. JEL Classifications: G21; G18; K2; M4.

Complexity of CEO compensation packages

This paper examines complexity in CEO compensation contracts. We develop a measure of compensation complexity and provide empirical evidence that complexity has increased substantially over time. We document that complexity results not only from factors reflecting efficient contracting, but also from external pressures from compensation consultants, institutional investors, proxy advisors, and attempts to benchmark to peers, with these external factors having greater impact in more recent years. Examining consequences of contract complexity, we find an association with lower future firm performance that is related to the influence of external factors on compensation design. We further find this relation is partially mitigated when a contract's performance metrics are more highly correlated, consistent with information processing costs hampering decision-making. Collectively, these findings confirm concerns raised by investors and the media regarding compensation complexity and can inform boards in their design of CEO pay packages.

Top–down and bottom–up information acquisition: Application to financial markets

Recent studies confirm the main prediction of the rational inattention framework that the perceived value of information (top–down) as a key driver of attention. However, these investigations also report stimulus-driven salience effects (bottom–up) that counteract the framework’s predictions. In this manuscript, I propose an extension to the standard rational inattention model by incorporating bottom–up attention processes such as salience-effects through varying information processing costs. Applied to asset pricing with a representative agent a higher information salience generally reduces the cost of information processing (attention) needed for the same level of uncertainty reduction. Due to a substitution effect in the attention allocation across information, an attention-maximizing salience emerges. In general, a higher information salience consistently enhances asset price informativeness.

Open innovation in a smart city context: the case of Sejong smart city initiative

Open innovation in a smart city context: the case of Sejong smart city initiative

Machine learning at the mesoscale: A computation-dissipation bottleneck.

The cost of information processing in physical systems calls for a trade-off between performance and energetic expenditure. Here we formulate and study a computation-dissipation bottleneck in mesoscopic systems used as input-output devices. Using both real data sets and synthetic tasks, we show how nonequilibrium leads to enhanced performance. Our framework sheds light on a crucial compromise between information compression, input-output computation and dynamic irreversibility induced by nonreciprocal interactions.

Information processing costs and credit ratings: evidence from investor interactive platforms in China

We examine the impact on bond credit ratings of reduced information processing costs from two investor interactive platforms in China, i.e. ‘Easy Interaction’ and ‘e-Interaction’. These online platforms provide investors with a channel to directly communicate with listed companies and learn much of corporate operations. Replies and explanations from management assist investors in integrating disclosed information and reducing information processing costs. The reduced costs likely impose reputational concerns on credit rating agencies (CRAs), leading to more stringent rating standards and less rating inflation. We find that more interactions result in lower credit ratings of corporate bonds. This effect is more pronounced for bonds rated by global-partnered CRAs and bonds whose issuers have higher information complexity, and less pronounced for bonds whose issuers have official consultation websites. Further analyses show that reduced information processing costs are associated with more information contents in rating downgrades and timelier ratings. Our findings provide evidence for the disciplinary effect of reduced processing costs on CRA behavior.

Commercial bank digital transformation, information costs, and corporate financial constraints

ABSTRACT The rapid development of digital finance has transformed traditional financial institutions. We investigate the effect and economic consequences of bank digital transformation on corporate financial constraints using data from China. The results show that bank digital transformation alleviates corporate financial constraints by decreasing information search, processing, and verification costs. Furthermore, the effect of bank digital transformation on corporate financial constraints is more pronounced for firms with higher contract intensity, more intangible assets, and poorer external information environment. We also find that bank digital transformation alleviates corporate financial constraints by increasing debt financing. In addition, we show that digital transformation promotes lending by big banks, resulting in the crowding-out effect. Finally, we find that bank digital transformation promotes the flow of credit resources to non-zombie firms, which effectively improves credit allocation efficiency. This paper extends research on digital finance and new structural finance from the perspective of bank digital transformation.

When the Format Matters: Information Processing Costs, Investor Engagement, and Firm Financial Constraints

When the Format Matters: Information Processing Costs, Investor Engagement, and Firm Financial Constraints

A Tale of Two News-implied Linkages: Information Structure, Processing Costs and Cross-firm Predictability

A Tale of Two News-implied Linkages: Information Structure, Processing Costs and Cross-firm Predictability

Firm Complexity and Information Asymmetry: Evidence from ML-based Complexity to Measure Information Processing Costs

Firm Complexity and Information Asymmetry: Evidence from ML-based Complexity to Measure Information Processing Costs

Common Auditors and Within-relationship Information-Processing Costs: Evidence from Supply Chain Relationships

Common Auditors and Within-relationship Information-Processing Costs: Evidence from Supply Chain Relationships

INNOVATIONS IN ACCOUNTING: THE USE OF BLOCKCHAIN TECHNOLOGIES TO INCREASE TRANSPARENCY AND SECURITY OF FINANCIAL TRANSACTIONS

In this article, we will look at how blockchain technologies can be used to increase transparency and security of financial transactions. We will look at examples of the use of blockchain technologies in the banking and insurance industry, and also consider how the use of blockchain technologies can help accounting and auditing. In the first part of the article, we will consider the use of blockchain technologies in the banking industry. We will look at examples of using blockchain technologies to ensure the security and transparency of financial transactions, including for money transfers, loans and securities management. In the second part of the article, we will look at the use of blockchain technologies in the insurance industry. We will look at how the use of blockchain technologies can help reduce the costs of authentication and information processing in insurance companies, as well as ensure faster and more accurate consideration of applications for payments. In the third part of the article, we will consider the use of blockchain technologies in accounting and auditing. We will look at examples of using blockchain technologies to simplify the audit process and increase its transparency, as well as to ensure the accuracy and timeliness of accounting statements. So, blockchain technologies represent a new tool that can help improve accounting and financial management processes, providing more transparent and secure financial transactions. In the following parts of the article, we will take a closer look at how blockchain technologies can be used in various industries and what benefits they can bring.

Common institutional ownership and stock price crash risk

AbstractThis paper presents new evidence on the economic benefits arising from common institutional ownership. We find a negative and significant effect of common institutional ownership on stock price crash risk. This effect is robust to a battery of robustness checks and is causal according to some identification tests, including difference‐in‐differences analyses on financial institution mergers. We find evidence that the negative effect is attributable to the monitoring role of common institutional owners—a role that is enabled by common owners' lower information processing cost and greater monitoring incentives owing to governance externalities. We also find that common owners negatively influence crash risk through constraining bad news hoarding and that common owners are more likely to force CEO turnover when a firm has higher crash risk. Overall, our results suggest that common institutional shareholders play a unique and effective monitoring role that fends off stock price crashes.

Subject Matter Complexity and Disclosure Channel Richness

ABSTRACT Despite the increase in and diversity of disclosure channels available, our understanding of how managers incorporate channel features into their disclosure decisions remains incomplete. I provide evidence that managers choose relatively rich channels that offer multiple cues, opportunities for interaction, and linguistic diversity (i.e., the earnings call, as compared to the press release) to communicate complex information. The positive relation between disclosure channel richness and subject matter complexity persists in both a document-level analysis and a small sample test examining disclosure channel choice from all possible disclosure channels. I provide some evidence that deviating from the complexity/richness matching strategy is associated with a muted market response to firms’ quarterly disclosures. The results are consistent with managers choosing disclosure channels to reduce investors’ information processing costs. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; M41.

Experience with Non-GAAP Earnings and Investors’ Pricing of Exclusions

ABSTRACT Although the increase in non-GAAP earnings metrics has drawn unfavorable attention from regulators and standard setters, it can provide valuable experience for investors. We investigate whether experience with non-GAAP earnings metrics influences investors’ pricing of non-GAAP exclusions. We measure experience as the frequency with which managers or analysts provide non-GAAP earnings over the prior eight quarters and find that experience aids in the pricing of non-GAAP exclusions. Absent prior experience with non-GAAP earnings metrics, investors appear to overestimate the persistence of exclusions at the earnings announcement, which corrects in the following months. Cross-sectional tests suggest that experience facilitates investors’ pricing of non-GAAP exclusions by reducing their information processing costs. JEL Classifications: M40.

Fragmented Securities Regulation, Information-Processing Costs, and Insider Trading

Using a unique setting where stand-alone banks submit filings to bank regulators instead of the U.S. Securities and Exchange Commission (SEC), we examine the consequences of fragmented securities regulation for information-processing costs and opportunistic insider trading. We find the market reaction to insider-trading filings on FDICconnect is less timely than to those on SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, suggesting FDICconnect generates higher information-processing costs. We also find only large investors trade more on insider-trading filings on FDICconnect than on insider-trading filings on SEC EDGAR, thus extracting benefits from the delayed market reaction to insider-trading filings on FDICconnect. Finally, we find increased insider selling in stand-alone banks prior to negative earnings news, suggesting insiders’ opportunistic use of private information. These findings collectively suggest regulatory fragmentation undermines market efficiency and distorts the level playing field. This paper was accepted by Suraj Srinivasan, accounting. Funding: This work was supported by the Eugene Lang Junior Faculty Fellowship. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4903 .

Companies’ Initial Estimates of the One-Time Transition Tax Imposed by the Tax Cuts and Jobs Act

ABSTRACT We use the Tax Cuts and Jobs Act as a setting to offer new insights into companies’ tax accruals. We examine companies’ estimates of the mandatory one-time transition tax on previously untaxed foreign earnings. We exploit the one-year measurement period provided by Staff Accounting Bulletin (SAB) 118, during which companies could adjust their initial transition tax estimates to examine how companies’ information gathering and processing costs affect these estimates. We find more accurate initial estimates for companies (1) with political access, (2) with less busy financial statement auditors, and (3) who previously accrued estimated incremental U.S. tax on foreign earnings. Finally, we find that companies with incentives to manage external perceptions that they pay their “fair share” of tax are more likely to overstate their initial transition tax estimates. Our study provides evidence of cross-sectional differences in companies’ financial reporting of income taxes during a politically sensitive time.

Cross-border regulatory cooperation and analyst forecasts

Using the staggered entry of foreign countries into the Multilateral Memorandum of Understanding (MMoU) as a shock to the cross-border regulatory cooperation and information exchange, we find that foreign firms cross-listed in the U.S. show a greater level of analyst following and a significant reduction in analyst forecast error and dispersion after their foreign home countries join the MMoU. Furthermore, the effect of the MMoU on analysts tends to be stronger for cross-listed firms with a greater level of information opacity and for analysts with greater difficulty forecasting cross-listed firms. To examine the potential channel, we find an increase in information/financial statement comparability after the entry of the MMoU by a firm's foreign home country. Collectively, our findings suggest that strengthened cross-border regulatory cooperation has a significant effect on reducing analyst information processing costs.

Logical and thermodynamical reversibility: Optimized experimental implementation of the not operation.

The not operation is a reversible transformation acting on a 1-bit logical state and should be achievable in a physically reversible manner at no energetic cost. We experimentally demonstrate a bit-flip protocol based on the momentum of an underdamped oscillator confined in a double-well potential. The protocol is designed to be reversible in the ideal dissipationless case, and the thermodynamic work required is inversely proportional to the quality factor of the system. Our implementation demonstrates an energy dissipation significantly lower than the minimal cost of information processing in logically irreversible operations. It is, moreover, performed at high speed: A fully equilibrated final state is reached in only half a period of the oscillator. The results are supported by an analytical model that takes into account the presence of irreversibility. This Research Letter concludes with a discussion of optimization strategies.