Information Asymmetry Research Articles

Concerted action agreements, corporate innovation, and financial market outcomes: A pre-registered report

This pre-registered study aims to investigate whether and how concerted action agreements enhance corporate innovation and create financial value. Based on theoretical analysis and numerous case studies, we expect to find that concerted action agreements significantly improve corporate innovation. The channels are at least two folds. First, by shielding entrepreneurs from short-term market pressure and enhancing their job security through enhancing their control rights, concerted action agreements spur long-term projects such as innovation. Second, through transferring control rights to entrepreneurs, concerted action agreements also strengthen entrepreneurs' stewardship role, which in turn mitigates agency problems and stimulates innovation. We further test the economic consequences of concerted action agreements and we expect to document that the agreements have a positive influence on firm performance and financial market valuation through enhanced corporate innovation. We also predict that because short-term market pressure and agency costs are high for high-tech firms due to information asymmetry, and because innovation is especially important for high-tech firms, concerted action agreements are most beneficial for high-tech firms. Finally, we predict that as time passes, the positive effects of concerted action agreements may diminish.

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.

Social responsibility and corporate borrowing

We study the impact of social capital, measured by corporate social responsibility (CSR) performance, on corporate borrowing. Using a sample of 120,204 bank loan applications of China's listed firms, we find that an increase in CSR performance increases the loan amounts of approved loans, although it does not alter the likelihood of loan approval. Using aggregate loans at the firm level, we show that CSR performance positively impacts firms' long-term borrowing from banks but does not affect their short-term borrowing. The economic magnitude of the positive effect is large at both the loan and firm levels. We attribute this positive relationship to reduced information asymmetry and improved risk mitigation. Surprisingly, we find that banks do not discipline their borrowers' CSR investments through the lending relationship. Specifically, when borrowers exhibit high CSR performance and borrow from banks with high CSR performance, further increases in CSR no longer correlate with larger loan amounts. Our findings suggest that China's state-led green credit policies should be more market-oriented.

Building consumer trust in secondhand fashion: A signaling theory perspective on how consumer orientation and environmental awareness shape engagement

The secondhand fashion market suffers from information asymmetry, creating consumer distrust and limited engagement in secondhand fashion (ESHF). The existing research on how sellers and product signals can mitigate this distrust is limited and produces conflicting results. This is particularly true in terms of understanding how signaling interacts with consumer-specific factors such as orientation and environmental awareness. Thus, this study contributes to understanding the factors driving consumer trust (CT) and ESHF through signaling theory and the nuanced role of consumer orientation and environmental awareness. Structural equation modeling, including multigroup analysis, is employed to test the proposed hypotheses with a sample of 203 Indonesian consumers from a secondhand market platform. The findings indicate that signals such as seller reputation, product history, and refurbishment details significantly enhance CT, with seller reputation being the most influential of the factors. The effectiveness of these signals varies by consumer orientation: functionality-oriented consumers respond more to remarketing information, whereas newness-conscious consumers are influenced more by refurbishment details. Additionally, consumer environmental awareness significantly strengthens the positive relationship between CT and ESHF, highlighting the importance of aligning environmental values with trust-building measures to enhance consumer ESHF. These insights enrich the theoretical understanding of signaling in secondhand markets and offer practical guidance for addressing the challenges associated with CT and ESHF.

Rules for the rulemakers: asymmetric information and the political economy of benefit-cost analysis

Rules for the rulemakers: asymmetric information and the political economy of benefit-cost analysis

Desensitization and Deception in Differential Games with Asymmetric Information

Desensitization and Deception in Differential Games with Asymmetric Information

Bank-affiliated directors' monitoring, earnings management, and financial reporting quality in emerging markets: Evidence from India

In this novel investigation of creditor governance in an emerging market, this paper examines the monitoring by Indian lenders of firms' earnings management and financial reporting quality through the appointment of a bank-affiliated director to the borrower's board. Specifically, we study the effect of having a bank-affiliated director on the board (a “BDB”), prior to the implementation of India's Insolvency and Bankruptcy Code (IBC). This setting represents a business environment characterized by underdeveloped financial institutions, a weak legal system, and inefficient bankruptcy resolutions. Unlike the U.S., where BDBs play a limited monitoring role, our evidence suggests bank-affiliated directors played an active role in firm governance and lowered earnings management as well as improving financial reporting quality in India during the period of our study. Specifically, we find lower discretionary accruals among firms with BDBs in cross-sectional, pre-post, performance matched, and propensity score matched analyses – signaling higher reporting quality and less earnings management. This finding holds after controlling for endogeneity and when measures of accounting conservatism or earnings persistence are utilized as additional measures of reporting quality. Further, the dampening effect of BDBs on discretionary accruals is more pronounced for companies subject to greater information asymmetry and those prone to agency problems. In addition, firms with BDBs on the board have less volatile ROAs and lower idiosyncratic risk, consistent with BDBs encouraging borrowers to pursue less risky investments to safeguard creditors' interests. As the first examination of the monitoring influence of BDBs on financial reporting quality – and earnings management in particular – in an emerging market, our results provide unique insights for policymakers and creditors seeking to enhance governance and reporting quality of firms in evolving business environments.

Assessing regulatory governance for the water and sanitation Agencies in Brazil

This paper focuses on evaluating and benchmarking the governance of regulatory agencies in Brazil's water and sanitation sector. Using a unique database obtained through the application of a questionnaire, we developed an index of regulatory governance and ranked all the agencies in Brazil that participated in the study. The index is an aggregate number of the evaluation of four key governance characteristics: Autonomy, Transparency, Accountability, and Tools & Capacity, including not only formal aspects of regulation but also indicators related to actual implementation. Based on 18 different indices, we analyze the positions of agencies with regard to different aspects of their regulatory governance, considering not only performance in each variable but also scores in the different components of each category. This evaluation identifies particular agency shortcomings regarding governance and indicates needed improvements. Although Brazil has strived to consolidate the governance design of its regulatory agencies, implementing the independent regulator model still faces several challenges. Various aspects of governance can be improved to pursue greater efficiency and quality in providing services, particularly in Accountability and Political Autonomy, where the country shows the largest number of regulatory agencies with the lowest scores. Conversely, almost half of the participating agencies show optimal scores in the Regulatory Autonomy aspect of governance. The results, for the most part, corroborate the institutional theory, in which the role of institutions is paramount for greater efficiency in providing public services, as it reduces information asymmetries and transaction costs and maximizes economic incentives.

Asymmetric Information in the Field of Healthcare

This essay explores the pervasive challenge of asymmetric information in healthcare, where the ideal of transparent markets often conflicts with the reality of information disparity. This essay analyzes critical sources, including academic papers and industry insights, and delineates the far-reaching impacts of asymmetric information on healthcare delivery and economics. The paper underlines the urgent need for comprehensive solutions to bridge the information gap and foster equitable access to healthcare. The research employs a multifaceted methodology, encompassing surveys, interviews, and literature reviews, to dissect asymmetric information in pivotal healthcare domains. The findings emphasize the necessity of improving doctor-patient communication, enhancing access to accurate medical insights, and incentivizing transparent information sharing for a healthcare landscape characterized by fairness and informed decision-making. The essay concludes by advocating for collaborative efforts involving policymakers, healthcare professionals, researchers, and consumers to realize a healthcare system free from the constraints of asymmetric information. Future research should delve into the long-term effects of improved information dissemination, the role of technology, and the behavioral economics aspects of healthcare decision-making.

Does financial market liberalization promote corporate radical innovation? Evidence from China

This paper investigates the impact of financial market liberalization on corporate radical innovation using Chinese non-financial firm-level data from 2000 to 2022. The results show that increased financial market liberalization promotes corporate radical innovation by alleviating financing constraints, enhancing capital allocation efficiency, and improving credit allocation quality. These findings remain robust even after replacing variable measurements, changing model specifications, and addressing endogeneity concerns. The positive impact of financial market liberalization on corporate radical innovation is more pronounced for firms facing higher financing constraints, governance efficiency, information asymmetry, marketization, and capital intensity. Our study underscores the critical role of thoughtful financial market reforms in driving high-quality corporate development.

THE MODERATING ROLE OF FIRM TRANSPARENCY IN INCREASING THE IMPACT OF IFRS ADOPTION ON THE FINANCIAL STATEMENTS COMPARABILITY: A CASE STUDY ON NORTH AFRICAN COUNTRIES

Objective: This study investigates how firm transparency affects the relationship between adopting International Financial Reporting Standards (IFRS) and the comparability of financial statements in North African countries. Theoretical Framework: The research is grounded in agency theory, suggesting increased transparency reduces information asymmetry between firms and stakeholders. Method: The study employs a quantitative research design, using data from publicly traded companies in North Africa. A multiple PLS-SEM analysis is conducted to examine the interaction between firm transparency and IFRS adoption, and their combined effect on financial statement comparability. Data sources include financial reports and transparency indices over five years. Results and Discussion: The findings indicate that while IFRS adoption alone improves financial statement comparability, the effect is significantly stronger for firms with higher levels of transparency. Transparent firms benefit more from IFRS adoption, as stakeholders find it easier to compare financial statements across different firms. The study highlights that transparency acts as a crucial moderating variable, amplifying the positive impacts of IFRS on comparability. Research Implications: The results underscore the importance of enhancing firm transparency in conjunction with adopting IFRS to maximize financial reporting benefits. Policymakers and regulators in North African countries should focus on promoting transparency to support more effective financial reporting and decision-making. Originality/Value: This research contributes to the limited literature on IFRS adoption in developing regions, particularly in North Africa. It provides new insights into how transparency influences the effectiveness of international accounting standards, offering valuable implications for both researchers and practitioners.

Corporate governance, information asymmetry and firm performance: evidence from Thailand

Corporate governance, information asymmetry and firm performance: evidence from Thailand

Tournaments and contracts under asymmetric information

In a principal–agent model, we compare tournament and contract schemes, which are both common methods of inducing effort. We assume that an agent’s type, which was private prior to contracting, becomes public during a tournament due to players’ interactions. We show that first-best effort levels can always be achieved in an efficient tournament scheme (ETS), where each agent can upgrade the prize by paying a fee to the principal. Furthermore, we provide sufficient and necessary conditions for the ETS to generate a higher payoff for the principal than the optimal contract scheme (OCS), with examples under mild conditions. In the absence of performance shocks, we provide a rationale for using a combination of tournaments and contracts in the presence of asymmetric information.

Followers beat content: social media and the managers in initial coin offerings (ICOs)

AbstractOur research investigates the role of social media communication in amplifying high-quality information and its impact on the success of ICOs in achieving their soft cap. We analyzed data from 3,644 ICOs and the demographics of 1,987 CEOs, CFOs, and CTOs to compare their quality attributes against their number of social media followers. Our findings reveal that the most significant factors for reaching the soft cap are the number of followers and team size, while the competencies (education and skills) of the management team have a very marginal effect, even when enhanced through social media. This indicates that widespread social media signals can positively influence investor behavior without necessarily reducing information asymmetries regarding the quality of the team. We propose that this effect arises from the combination of minimal investment amounts and stimulated herding behavior among investors.

Research on the risk effects of accounting information disclosure

Drawing upon accounting-based asset pricing model and insights from theories of information asymmetry and cognitive psychology, this study investigates the risk implications of accounting information disclosure from dual perspectives: firm-specific risk and market risk. Our findings reveal a positive association between earnings management and both firm-specific and market risk effects of accounting information, underscoring the presence of post-disclosure risk effects. Heterogeneity analysis further uncovers the moderating roles of factors such as accounting firm size, company tenure, and regional economic growth in firm-specific risk effects, while corporate governance structures influence market risk effects. This study enriches the theoretical literature on accounting information and risk effects.

Research on Coordination of Fresh Supply Chain Considering Supplier Misreporting and Consumer Return

Misreporting is prevalent in supply chain characterized by asymmetric information, and its impact on the supply chain is substantial and cannot be overlooked. In order to explore the impact of fresh supplier’s misreporting decisions on fresh supply chain, this paper takes the fresh supply chain with a single fresh supplier and a single e-commerce enterprise as the research object, and constructs five Stackelberg game models based on the differences of supply chain information transparency and power structure. Particularly, the effect of fresh-keeping level on the after-sales rate and market demand of the product is incorporated into the model, and the following conclusions are drawn by solving and analyzing the decision results of the different models: (1) When the supplier has the decision advantage, it will not choose to misreport. But when it loses the decision advantage, it will produce the misreporting behavior. Supplier misreporting is detrimental to the retailer and the supply chain; specifically, it can lead to lower fresh-keeping level and higher after-sales rates. (2) In the decentralized decision-making model, it is more beneficial for the supply chain that the supplier has the leading right of decision-making. In the absence of misreporting, the leader’s profit is always higher than that of the follower. When there is misreporting, even if the retailer is the dominant player, its profit is still lower than the manufacturer’s. (3) Both supply chain profit and fresh-keeping level are positively correlated with the coefficient of consumer perception of freshness and the coefficient of sensitivity to fresh-keeping technology, and are more significant under the centralized decision-making model. Furthermore, in response to supplier misreporting behavior, this paper achieves coordination in the fresh supply chain by designing a joint contract and confirms the effectiveness of this contract through an arithmetic analysis.

Manufacturer’s Channel Strategy and Demand Information Sharing in a Retailer-Led Green Supply Chain

In the rapidly evolving landscape of e-commerce, companies are increasingly focusing on their channel strategies to gain sustainable development. However, asymmetric demand information poses challenges to these decisions. This paper explores the interplay between a retailer’s information sharing strategy and a manufacturer’s channel strategy in a retailer-led green supply chain, where the manufacturer may establish an online channel to sell its green products directly. The dominant retailer has private demand information about the market and decides whether to share private information with the manufacturer. By establishing a game model, we analyze the impacts of information sharing and the manufacturer’s channel strategy on the payoffs for all the supply chain members, considering sustainability aspects such as the environmental benefits of green products and the efficiency of supply chain operations. The results show that information sharing benefits both the retailer and the manufacturer, irrespective of the establishment of an online channel. When the retailer shares demand information, opening an online channel benefits the manufacturer but benefits the retailer under certain conditions. Furthermore, through a numerical approach, we examine the strategic preferences of the firms and derive the equilibrium strategy. Interestingly, the manufacturer consistently prefers the scenario involving both an online channel and information sharing. The retailer’s preference, however, depends on the direct selling cost; it favors information sharing with or without an online channel based on this cost. Ultimately, our findings suggest that the equilibrium strategy can either be sharing information with an online channel or not sharing information without an online channel, which is contingent upon the direct selling cost and the forecast signal precision. These insights provide actionable strategies for enhancing the sustainability of supply chain operations.

Early warning response to rainstorm: Designing a model with incentive and supervision mechanisms based on the principal-agent theory

Owing to the increasing frequency of rainstorm disasters, strengthening the link between meteorological warning and emergency response that is early warning response has become crucial. However, early warning response usually fail, the underlying reasons behind this phenomenon and their improvement measures need to be urgently explored. This study uses the principal–agent theory to establish an incentive-constraining model based on hierarchical government to explore this problem. Considering the interest game between the superior and local governments, we mainly discuss how to design the optimal incentive mechanism under the condition of information asymmetry to enhance the local government's enthusiasm for providing an early warning response to rainstorm, thereby maximizing the benefits for both parties in the model. Furthermore, based on actual conditions, we use numerical simulation to present the model results more clearly. The results indicate that incentive and supervision mechanisms are mutually substitutable. Strong early warning capability and active public cooperation can improve the local government's enthusiasm for providing an early warning response. Excessive costs lead the local government to adopt a negative attitude toward warning, regardless of supervision is introduced. Only when the local government exhibits strong risk aversion and its investment is affected by numerous random factors, introducing supervision is effective. Meanwhile, too many external factors, excessive or insufficient supervision's intensity also affect the optimization effect of supervision on incentive contract. To maximize the effectiveness of supervision, the superior government should improve the supervision team's capability, and maintain the supervision's intensity within a reasonable range.

Environment-specific political risk discourse and expected crash risk: The role of political activism

This study examines whether greater discourse on environment-specific political risk (EPR) in earnings conference calls (ECCs) has a favourable effect on firms' information environment affecting stock price crash risk. Under the risk mitigation hypothesis, EPR discourse lowers crash risk, whereas, under the risk escalation hypothesis, management may exploit information asymmetry leading to greater crash risk. Results from US firm-year observations reveal that the EPR discourse of the current year reduces the crash risk of the following year, thus supporting the risk mitigation hypothesis. Further, this study shows that the effect of EPR discourse on crash risk is more pronounced for politically active firms, potentially due to their proximity to the political decision-making process and better access to associated information. Additionally, the results suggest that the negative association between EPR discourse and crash risk is stronger in the democrat regimes and for the firms with more institutional monitoring and characterised by a higher level of integrity. Random Forest and Extreme Gradient Boosting machine learning algorithms support the effectiveness of EPR discourse in predicting crash risk. The primary results remain robust to potential endogeneity concerns.

The Role of Fair Value Accounting in Debt Structure Decisions: Evidence from Priority Structure and Financial Flexibility

Synopsis The research problem This study investigates whether the debt structure of a firm — that is, how a firm organizes its debt contracts — depends on the extent to which fair value measurement is applied to the balance sheet. Motivation Most public firms have a nontrivial percentage of balance sheet items measured at fair value under the mixed attribute accounting, and there is a lack of understanding of its effect on the reporting entity’s debt structure. This study focuses on two aspects of the debt structure that have both practical and theoretical relevance, namely the priority structure and the financial flexibility. A priority structure involves the simultaneous use of different priorities of debt and is common among risky borrowers. Survey results show that financial flexibility is of first-order importance regarding the debt policy of firms. Here, financial flexibility refers to a firm’s ability to pursue new investment opportunities via debt issuance. The test hypotheses The first hypothesis states that a borrower with a higher percentage of balance sheet items measured at fair value is less likely to have a priority structure. The second hypothesis states that a borrower with a higher portion of balance sheet items measured at fair value likely has a debt structure that is more financially flexible. The third hypothesis states that the fair value of liabilities and the fair value of assets are equally relevant to debt structure decisions. Target population This study focuses on nonfinancial firms in North America that are subject to the mixed attribute accounting, which measures a certain percentage of assets and liabilities at fair value. Adopted methodology The main tests use multivariate analysis that includes both logistic regressions and OLS regressions. Additional tests include cross-sectional analyses and the Granger causality test. Analysis Using a sample constructed from Compustat North America and Capital IQ (6,220 firms and 36,487 firm-year observations), the main tests regress dependent variables, namely the priority structure measures and financial flexibility, on the exposure to fair value measurement. Findings Results show that fair value measurement reduces information asymmetry and has favorable effects on the debt structure. A high exposure to fair value measurement reduces the need for a priority structure. A high exposure to fair value measurement also enhances financial flexibility. Additional analyses reveal that the favorable effect mainly comes from assets measured at fair value. The effect becomes weaker with respect to liabilities measured at fair value.