Information Asymmetry Problems Research Articles

Does Cultural Difference Affect Investment–Cash Flow Sensitivity? Evidence from OECD Countries

AbstractWe investigate the influence of national culture on corporate investment–cash flow sensitivity. We conjecture that national culture shapes managerial perceptions of information asymmetry and agency problems, thus impacting the investment–cash flow relationship. We document empirical evidence in support of our claim. By linking the investment–cash flow sensitivity to cultural differences, our findings show that, while collectivism has an attenuating influence, uncertainty avoidance, power distance and masculinity have a reinforcing effect on the relationship between cash flow and investment. Our results hold for a sample of 205,268 firm‐years across 24 OECD countries between 1990 and 2017, and are robust after accounting for alternative statistical approaches, sample compositions and measures of cultural dimensions, along with controls for institutional and governmental factors. In addition, by decomposing cash flow into uses and sources of funds in a dynamic multi‐equation model, where firms make financing and investment decisions jointly subject to the constraint that sources must equal uses of cash, we find that national culture shapes how firms react to changes in cash flow.

Did mandatory IFRS adoption affect the cost of capital in Latin American countries?

This study investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has affected the long-term cost of equity and debt in Latin America, where the enforcement of accounting standards and investor protection mechanisms are weak in comparison to developed nations. Analyzing a sample of firms from Argentina, Brazil, Chile, Mexico, and Peru, we show that mandatory IFRS adoption led to reduction in the cost of equity even after controlling for firm-level reporting incentives. Test results also show that the cost of debt was reduced significantly after the IFRS adoption. Our results suggest that enhanced disclosure and comparability stemming from IFRS in comparison to previous domestic accounting standards helped to mitigate the information asymmetry problem, and resulted in positive economic consequences for Latin American firms.

Corporate governance and stock liquidity: evidence from a speculative market

PurposeGrounded in lemon market theory, this paper aims to examine the influence of corporate governance (CG) on stock market liquidity in Bangladesh, where stock market manipulation because of speculative trading is a common concern.Design/methodology/approachThis study is based on a sample of 2,420 firm-year observations covering all non-financial firms in Bangladesh from 1996 to 2011.FindingsThis study’s results show a significant relationship between governance and liquidity within firms over time. In particular, within firms, when governance quality increases, liquidity significantly improves. For instance, a rise in the governance quality by one standard deviation decreases the illiquidity ratio by 55.97%. The results are unlikely to be confounded by endogeneity.Practical implicationsThe results have important policy implications for security regulators, investors, traders and managers. The results support the current regulatory trend of strengthening CG practices in the listed firms in Bangladesh.Originality/valueThis study contributes to the understanding of the role of effective firm-level CG on stock liquidity in the context of an emerging country. Consistent with prior research mostly conducted in the advanced economies, it provides further empirical support that higher CG quality reduces the information asymmetry problem and enhances stock liquidity even in a speculative market.

Credit Risk Classification in Peer-to-Peer Marketplaces: The Nexus of Neural Network Approach

Financial innovation in recent years have prominently contributed to the growth of Peer-to-Peer lending marketplaces allowing individual and businesses to secure loans on a common internet-based network. Similar to the ‘bricks and mortar’ banking system, online lending is coupled with the problem of information asymmetry. Borrower risk assessment has henceforth become the major concerns of various platforms that aim to reducing information imbalance towards mitigating credit risk. In this article, authors compared two learning algorithms – Logistic regression and Artificial Neural Network to classify borrowers based on loan repayment schedule. We revealed that both approaches were robust in classifying late borrowers with logistic regression being 0.02% more robust than Neural Network. Regarding variable relative importance, gender is considered the least important variable whereas terms-of-repayment is the most important variable affecting borrowers’ intention to pay off loans. Even though our study contributes to existing literature, it is however not limited to determining factors that may affect lenders’ investment decision in social lending.

The effects of accounting conservatism on executive compensation

PurposeThe purpose of this paper is to identify means of better associating executive remuneration with managerial decision making and firm performance.Design/methodology/approachThe authors evaluate the influence of conditional accounting conservatism on CEO compensation. The authors focus particularly on the ex ante pay-for-performance sensitivity (PPS) of CEO stock option grants. The empirical method used is panel data regression.FindingsThe authors find that accounting conservatism is positively related to the PPS of CEO option-based compensation. The effects of accounting conservatism on the PPS of options are more significant for firms with relatively weaker corporate governance and for the period before the introduction of FAS 123R. The findings suggest that directors reward CEOs for adopting accounting conservatism, both in general terms and incrementally, and that rewards are channelled through incentive-linked compensation. The results are also consistent with the view that accounting conservatism compliments other mechanisms, such as corporate governance, in reducing information asymmetry and agency problems between managers and shareholders and other stakeholders.Originality/valueThis paper provides a number of important contributions to the literature. It is the first to identify a relationship between accounting conservatism and option-based CEO compensation, which has important potential contracting and enforcement implications due to the incomplete nature of option contracts and the reward and risk attributes of CEOs. This paper is also the first to analyse the association between conditional accounting conservatism and CEO compensation at the firm–year level, by employing the firm–year conservatism score approach proposed by Khan and Watts (2009). This provides for greater insight regarding the interaction between accounting conservatism and other firm-specific elements than is otherwise obtainable from an overall firm or year interpretations derived from the traditional Basu (1997) asymmetric timeliness model approach. Furthermore, this paper also provides a comparison of the relative association of accounting conservatism on both explicit and implicit forms of CEO compensation for the same firm sample. This allows for the assessment of whether accounting conservatism relates differently to incentive-based CEO remuneration relative to ex post CEO compensation outcomes.

Public-Private Partnership as a Tool of Health Infrastructure Development in Digital Economy

The article is devoted to analyze the digitalization process in the development of public-private partnership mechanism in informational healthcare infrastructure. The importance of information asymmetry problem is shown in the health insurance market, and the mechanisms that can minimize it are analyzed: public-private partnership and concession. Based on the analysis of report “The Development of Digital Economy in Russia”, the importance of the digitalization process was identified for the social sphere, and the main directions were outlined for the development of the digital economy in Russia. Aim of the article is to analyze the features of public private partnership mechanism in healthcare related to the process of digitalization of the economy. The object of study is the public-private partnership mechanism. Subject of the study include economical, organizational and social relations arising in the process of applying the PPP mechanism for the development of digitalization. The analysis method made it possible to comprehend the main trends of the digitalization process in relation to the healthcare sector. The method of synthesis helped to find the relationship between these trends. Comparative analysis allowed comparing two key models of health insurance. The article allows understanding the key trends of the digitalization process in health care. Аs a result, it will be useful for experts involved in the development of healthcare infrastructure based on the PPP mechanism.

Effect of Unemployment Duration on Subjective Quality of Employment in Côte d’Ivoire

Quality of employment is a current concept in both developed and developing nations. Studies on this subject explore more its objective aspect in relation to their own dimensions. This article examines the subjective nature of this notion in relation to the opinion given by workers on it. The objective is to highlight the impact of unemployment duration on the subjective quality of employment in Côte d’Ivoire. In pursuing such an objective, the author seeks to perceive whether the duration spent in unemployment is likely to have a positive or negative impact on the perception that workers have of their jobs; this could shed light on the problem of information asymmetry, particularly adverse selection. To measure this impact, the author uses secondary data from the National Survey on the Employment Situation and the Informal Sector (NSESIS) 2016 of the Youth Employment Agency in Côte d’Ivoire and the National Institute of Statistics (NIS). To correct for a possible selection bias about the choice of workers in the private sector, the author uses “Heckman’s two-step approach”. This involves two modelling exercises. From the first model, the bivariate probit, an inverse of the Mills ratio is generated and introduced into the second model, the binary probit. In order to better perceive the effects of unemployment duration on subjective job quality, the author uses the variable “unemployment duration before obtaining employment” as a control variable. The results show that the duration spent in unemployment has a very significant effect on the perception of employment. Reconsidering the same individuals in the sample with the presence of the control variable, we find that workers tend to view the quality of their jobs positively. This could pose a problem of appreciation even if objectively their jobs are of lower quality.

Imperfect Quality Certification in Lemons Markets

In markets with information asymmetry, the seller of a high-quality product is unable to credibly communicate its quality to buyers and is forced to price like an average quality seller. This is a disincentive to provide quality and high-quality sellers may exit the market. Of several methods to reduce information asymmetry, we provide an analytical study of certification or grading of quality levels by infomediaries. In the equilibrium of a quality reporting game, we find that certification reduces, but does not eliminate, the problems of information asymmetry. There exists a threshold, determined by the accuracy of the certification process, below which customers should believe quality reports, but disbelieve reports above it. We further examine a two-category scheme of high/low quality certification and discuss the design of certification grades using an entropy approach.

What Can Children Learn from a Free Trial of Eyeglasses Use? Evidence from a Cluster‑Randomized Controlled Trial in Rural China.

Free trial is a widely used business strategy that takes advantage of information asymmetry. However, evidence on what we can learn and how rapidly we can learn from a free trial of health care is limited. This study evaluates the effect of a free trial of eyeglasses on children’s 8 items of perception related to eyeglasses use. An evaluation was conducted alongside a cluster-randomized controlled trial involved 832 myopic children from northwest rural China. A total of 428 myopic children from 42 schools were randomized to receive free eyeglasses, and 404 myopic children from 42 schools were randomized as control group. We find that the perceived costs and benefits of eyeglasses use and the perceived timing of wearing eyeglasses at the appropriate time can be learned from a free trial of eyeglasses. Compared with the control group in the long run, 5.6 percentage points more children in treatment group agreed that wearing eyeglasses was attractive, 16.5 percentage points more children agreed that wearing eyeglasses is helpful to academic performance, and 7.9 percentage points more children agreed that children with vision problems should wear eyeglasses. Due to the effects of a free product and the time to learning from experience, the magnitude of the impact of a free trial changed over time. We also find that the indirect experience, such as a vision protection course, cannot change children’ perceptions about the cost or benefits of eyeglasses use. The findings imply that children can learn significantly from the experience of a free trial of eyeglasses. A free trial is an effective strategy to solve the information asymmetry problem for health care. The first pair of eyeglasses of children can be one-off subsidized to trigger demand for eyeglasses use.

R&D Spending and Stock Returns: Evidence from South Korea

This study examined how research and development (R&D) spending affects stock returns. Three strands of research make different predictions about how R&D affects stock prices. The agency theory, presented by Jensen (1986) argues that managers do not make a corporate decision on behalf of shareholders and rather pursue their personal benefits by undertaking value-reducing projects such as R&Ds. The overconfidence theory suggests that overconfident managers tend to invest more in R&D because they overvalue their ability and they are excessively optimistic about future success of the R&D investment. These two theories predict that firms that invest more in R&D earn lower returns than those that invest less. In contrast, the signaling theory predicts that high-quality firms use R&D spending as a means of communicating with the stock market to mitigate information asymmetry problem, resulting in higher returns of the firms. Using data from Korean firms listed from January 1992 to December 2015 we showed that portfolios that invested heavily in R&D earn consistently high abnormal returns and that, consequently, spending on R&D is an effective explanatory factor for stock returns. We also found that the impact R&D expenditures has on stock value was long-term, as well as short-term. Overall, these results are consistent with the signaling theory in that R&D spending is an important channel through which firms improve their values by communicating with the stock market.

Market Manipulation Rules and IPO Underpricing

Using a large sample of 13,459 initial public offerings (IPOs) from 37 countries, we find that trading rules on market manipulation reduce IPO underpricing. The effect is weaker for IPOs certified by reputable intermediaries, in countries with greater shareholder rights protection, better financial reporting quality, and after the adoption of International Financial Reporting Standards. Better trading rules on market manipulation are also related to higher IPO proceeds, subscription-level, and trading volume, lower IPO listing fees, and better long-term post-IPO performance. Our findings are consistent with the notion that exchange trading rules mitigate information asymmetry problems for investors, resulting in lower IPO underpricing.

Institutional Aspects of the Power Abuse Problem in Healthcare Under Totalitarian Rule: Case of Nazi Germany

German Imperial Government fearing socialist rivals’ would benefit from the possible success of private non-commercial healthcare insurance prevented the rise of thereof. The governmental run system was established instead. The trend was solidified by social-democratic and other governments during the Weimar Republic period. German physicians’ experience to work for government first and foremost in the framework of non-patient interests centered system make this professional group the most adaptive to Nazi totalitarian rule. While under free society and democratic rule information asymmetry problem is mitigated more or less successfully by a number of reliable, tested solutions, under totalitarian rule, doctor-patient asymmetry not counted as a problem at all (at the best).

FOREIGN OWNERSHIP AND CORPORATE VALUE OF LISTED CONSUMER GOODS FIRMS IN NIGERIA

This study was motivated by the agency problem and information asymmetry problem of managers not acting completely in the interest of the owners following the shareholder’s value maximization objective. The study therefore sought to determine the effect of foreign ownership on corporate value of listed consumer good firms in Nigeria. Tobin Q was adopted as proxy for corporate value. The study adopted a descriptive research design using panel regression analysis to explain the relationship between the research variables. The population for the study was all consumer good firms listed on the Nigerian Stock Exchange (NSE) as at December 2016. Ten years panel Secondary data from CBN statistical bulletins, NSE reports, SEC reports and individual firm’s books were used for the study. From Random Effects Model of the analysis, the study found a positive non-significant effect of Foreign Ownership on Corporate Value of the sampled firms. This study recommends that foreign ownership policies of the firms can remain indifferent since its effect is insignificant.

A Tale of Two Markets: How Lower-end Borrowers Are Punished for Bank Regulatory Failures in Nigeria

In 2009, the Nigerian banking system witnessed a financial crisis caused by elite borrowers in the financial market. Regulatory response to the Nigerian crisis closely mirrored the international response with increased capital and liquidity thresholds for commercial banks. While the rise of consumer protection on the agenda of prudential supervisors internationally was logical in that consumer debt was the main cause of the global recession, the Nigerian banking reforms of 2009 disproportionately affected access by poorer consumers, who ironically had little to do with the underlying causes of the crisis. As lending criteria become more stringent, poorer consumers of credit products are pushed into informal markets because of liquidity-induced credit rationing. Overall, consumer protection is compromised because stronger consumer protection rules for the formal sector benefits borrowers from formal institutions who constitute the minority of borrowers in all markets. While the passage of regulation establishing credit bureaux and the National Collateral Registry will, in theory, ease access to credit especially by lower-end borrowers, the vast size of the informal market continues to compound the information asymmetry problem, fiscal policies to tackle structural economic issues such as unemployment and illiteracy remain to be initiated, and bank regulators continue to pander to elite customers with policy responses that endorse too big to fail but deems lower-end consumers too irrelevant to save. The essay concluded that addressing the wide disparity in access to credit between the rich and poor through property rights reforms to capture the capital of the informal class, promoting regulation to check loan concentration, and stimulating competition by allowing Telecommunication Companies (TELCOs) and fintech companies to carry on lending activities because of their superior knowledge of lower-end markets will facilitate greater access. The risk of systemic failure deriving from consumer credit in Nigeria is insignificant compared to the consumer vulnerabilities resulting from the exposure of consumers to unregulated products in the informal market.

Buyers of ‘lemons’: How can a blockchain platform address buyers’ needs in the market for ‘lemons’?

The second-hand automotive market is one with the least trust from consumers. Customers on the second-hand car market suffer from such problems as the car being in worse condition than initially indicated, accident damage that is not disclosed, fraud, etc. Akerlof, described the market for used cars as an example of the problem of information asymmetries and resulting quality uncertainty. In order to cope with quality uncertainties, used car buyers actively engage themselves in information seeking. Blockchain technology promises to automatize the tracking of cars through their lifecycles and provide reliable information at any point in time it is needed. In our study, we investigate the problems car buyers face during information seeking and propose requirements for the design of a blockchain-based system to address these.

Credit decision-making and information requirements

The world economy experienced a systemic financial crisis that resulted from a period of excessive borrowing and lending. The purpose of the research was to understand the credit decision-making process and the information requirements by banks. A survey was conducted among twenty-two Brazilian credit establishments and results showed that the perceived importance and actual frequency of use of resources such as audited accounts, banker´s internal records and loan experience were similar and security was an important issue for small businesses due to the problem of information asymmetry.
 Keywords: Credit decision-making, information asymmetry, large and small companies
 JEL: G21-Banks, F65-Finance, G2-Financial Institutions and Service

Does gender diversity on boards reduce information asymmetry problems? Empirical evidence from the French market

PurposeThe purpose of this paper is to investigate the effect of female members in boards of directors on asymmetric information in the French stock market.Design/methodology/approachThe authors use two proxies for asymmetric information: the idiosyncratic volatility and the bid-ask spread. This study is conducted on all listed firms in the SBF 120 index between 2002 and 2012.FindingsResults show that gender diversity in boardrooms has a negative effect on the level of private information in stock markets and reduces the bid-ask spread. However, these effects are significant in family-controlled firms: female inside directors significantly increase the idiosyncratic volatility and the bid-ask spread, while female independent directors decrease both proxies for stock market liquidity.Research limitations/implicationsOur empirical findings contribute to the current debate on the benefits of gender diversity on corporate boards from the market perspective. It shows that, under specific conditions, financial markets could be receptive to the presence of female directors in boardrooms.Practical implicationsPractitioners and policymakers advocate the benefits of gender diversity on corporate boards. This paper shows that when the protection of minority shareholders is poor, the stock market is receptive to the presence of women independent directors, only in family controlled firms. This is a further argument that could help women to overcome glass-ceiling barriers they usually face to achieve top management positions.Originality/valueThis paper provides support for the increased attention paid to gender-diverse boards. It addresses the market sensitivity toward the presence of women members in French boardrooms and their positions. This is the first paper, to the best of our knowledge, to address how appointing women to different positions in the boardroom could provide signals to investors in the presence of asymmetric information. French firms are mostly family controlled. Thus, the findings bring valuable information of the impact of board diversity on the stock market considering family and nonfamily firms.

Evolutionary dynamics of health food safety regulatory information disclosure from the perspective of consumer participation.

The “trust” attribute of health food has intensified the serious information asymmetry problem in the health food market. Moreover, it has strengthened the formation and influence of potential or hidden safety risks of health food, bringing huge impacts on social harmony and stability. Therefore, this study builds a model of health food enterprise production and operation and government regulatory information disclosure from the perspective of consumer participation. The study fully considers the government's policy burdens and the degree of consumer response to food safety regulatory information. Moreover, it aims to explore the evolution mechanism of food enterprise production and operation strategies and government regulatory information disclosure strategies and analyze the evolution process of the government behavior in health food safety regulatory information disclosure. The theoretical derivation and simulation analysis found that the more sensitive consumers are to health food safety regulatory information, the more significant the profitability improvement of enterprises producing quality health food, thus urging the government to make an objective and comprehensive disclosure of health food safety regulatory information.

Do productive firms get external finance? Evidence from Chinese listed manufacturing firms

Due to information asymmetry problem in financial markets good quality firms often find it difficult to prove to external finance providers about their true quality and to distinguish themselves from bad quality firms. We argue that instead of sending indirect signals to financial market good quality firms could focus on improving their productivity to obtain external finance. Besides relying solely on firms' balance sheet information external finance providers using firms' TFP or labour productivity information would have a true knowledge of firms' efficiency and risk. Overall, using a panel of 1591 Chinese listed manufacturing firms between 2003 and 2016 we find that productivity measured by TFP or labour productivity is statistically and economically important and positive in determining firms' external finance, i.e. total leverage, new issue of equity and long-term debt. We find that productivity is helpful for firms to raise new equity finance, but only some weak results for total leverage and long-term debt. Such results hold for both the whole sample and private firm sample. We also find that large and/or old firms and exporting firms are able to make better use of their productivity to gain external finance than their respective counterparts, i.e. small young firms and non-exporting firms. The causality of the regression results is also confirmed by difference-in-difference tests using an exogenous industrial policy shock.

How a pre-IPO audit committee improves IPO pricing efficiency in an economy with little value uncertainty and information asymmetry

Abstract We examine the effect of a pre-IPO audit committee on IPO pricing from the perspectives of information asymmetry and agency problems. We propose a bargaining power hypothesis to disentangle the information asymmetry explanation (financial reporting quality) from the agency problems explanation (underwriter bargaining power) on IPO pricing. IPO underpricing can be reduced by increasing the financial reporting quality under information asymmetry and/or by decreasing the underwriter bargaining power under agency problems. An audit committee can raise the quality of financial reporting and reduce the bargaining power of underwriters. With a pre-IPO market, the IPO markets in Taiwan have little information asymmetry, thus leading to the weak importance of reducing information asymmetry. We show that the establishment of a pre-IPO audit committee improves IPO pricing efficiency by reducing underwriter bargaining power rather than by raising the quality of financial reporting in Taiwan.