Internal Information Asymmetry Research Articles

Internal information asymmetry and power distance

Using the difference in insider trading profitability between top and lower-level managers to proxy for firms’ internal information asymmetry, we show that power distance increases internal information asymmetry in an international sample of 10,103 firms across 22 economies from 2003 to 2018. Furthermore, we find that this positive impact is lessened for firms with less complexity, more female directors on board, or an internal CEO promoted from within the firm. Moreover, we show that a country’s high-quality formal institutions lessen the role that a country’s culture of power distance plays in escalating internal information asymmetry. Our main conclusions remain valid after taking into account robustness and endogeneity issues.

Do corporate site visits affect the informational role of independent directors?

AbstractThis study examines the influence of corporate site visits on information acquisition and dissemination by independent directors (IDs). Employing two unique sources of data from Chinese listed firms based on the mandatory disclosure of IDs’ (i) site visit activities and (ii) opinions about corporate decisions, we find that the acquisition of firm‐specific information and the dissemination of such information to the market are greater among IDs who conduct visits than their counterparts without such visits. Moreover, this effect is more pronounced in firms with complex information environments, in firms with lower proprietary costs, and among IDs with greater internal information asymmetry, superior external information, and stronger incentives and abilities to perform their duties. Furthermore, the firm‐specific information disseminated by IDs leads to stronger market reactions and improves stock price efficiency. Our study shows that site visits contribute to the informational role of IDs, and our evidence offers important corporate governance and regulatory implications.

Social connections and innovation in diversified conglomerates

AbstractWe study the effect of social connections between divisional managers and CEO on the scale and success of innovation activities in US diversified conglomerates. Divisional managers who previously worked or studied with the CEO file a greater number of patents during their tenure at the segment. These patents receive more citations in the future and represent a greater scientific and economic value. To provide causal support for our findings, we exploit plausibly exogenous variation in connections caused by CEO nonperformance‐related retirements. The difference‐in‐differences estimation shows that after the CEO leaves the office, connected segments experience a drop in the quantity and quality of innovation activities. The effect of connections to the CEO on innovation outcomes is stronger in firms with high internal information asymmetry. These findings can imply that social connections help to mitigate adverse selection problems associated with risky R&D investments.

Internal Information Asymmetry and Decentralized Disclosure: Evidence from Textual Analysis of Company Responses to Investor Questions *

Internal Information Asymmetry and Decentralized Disclosure: Evidence from Textual Analysis of Company Responses to Investor Questions *

Internal Information Quality and Corporate Employment Decisions

AbstractPrior studies argue that high‐quality internal information improves forecasting and reduces internal information asymmetry, and hence facilitates firms’ decision‐making. Consistent with this argument, we find that internal information quality (IIQ) is positively associated with employment efficiency. Furthermore, we find that better IIQ leads to an improvement in employment efficiency primarily by improving demand forecasts. The baseline finding is robust to using a setting that exploits time‐series shocks to IIQ (i.e., the adoption of SFAS 158) and other sensitivity analyses. Our findings add to prior studies on the role of IIQ in decision‐making.

Inexperienced Component Auditors and the Internal Information Asymmetry of Multinational Corporations

With the global expansion of business operations, many U.S. corporations now operate internationally. While these multinational corporations (MNCs) rely on information about their operations to allocate resources, this information is likely dispersed within the firm, leading to internal information asymmetry between top executives and divisional managers. Meanwhile, audits of these geographically dispersed MNCs are challenging, and parts of these audits are sometimes outsourced to local foreign auditors who have no experience serving as opinion-issuing auditors for U.S. issuers (“inexperienced component auditors”). In this article, we examine whether involving such inexperienced component auditors is associated with MNCs’ internal information environment. We find that, relative to a matched control sample, Securities and Exchange Commission (SEC) issuers with the participation of inexperienced component auditors have higher internal information asymmetry and lower internal capital allocation efficiency. Our results suggest that audit quality matters not only to a firm’s external financial statement users but also to its internal users.

Seller Organization and Percentage Fee Design in the Daily Deal Market

The prosperity of the daily deal business has attracted more sellers to participate in daily deal campaigns with offering discounted deals via online platforms like Groupon and Juhuasuan. This gives rise to a new challenge for online platforms on how to efficiently organize a limited number of sellers to conduct daily deal campaigns. Our paper makes the first attempt to understand how different seller organization formats can influence the firms’ equilibrium strategies and profits in the daily deal market. We focus on two prevalent seller organization formats. (1) The seller agglomeration strategy: the platform (e.g., Groupon) does not distinguish the sellers’ type in each round of the campaign. (2) The seller segmentation strategy: the platform (e.g., Juhuasuan) organizes sellers of the same type in each round. Comparing to the agglomeration strategy, we show that the segmentation strategy can eliminate internal information asymmetry among competing sellers and thus can improve the sellers’ pricing efficiency and facilitate the platform to charge a higher percentage fee. This uncovers the value of seller segmentation and theoretically explains why platforms should carefully segmentate sellers in daily deal campaigns, although considerable efforts are required to enroll sellers.

The Analysis of Agency Theory: A Research for Shuozhou Coal Economy Development

Agency theory was presented by Jensen and Meckling in 1976. Agency theory mainly involves the contractual relationship between the provider of the enterprise resource and the user of the resource. Agency theory is developing from the researching of internal information asymmetry and incentive problems. According to agency theory, the owner of the economic resource is the principal, the manager who is responsible for the use and control of these resources is the agent. And the central task of the agency theory is to study how the client of can design the optimal contract incentive agent under the conflict of interest and information asymmetry. While if the interests of principal and agent are not exactly the same, the principal in the information disadvantage and can not entirely on the agent supervision, the agent has the motive for their own interests, and makes damage to the principal, it will result in the agent problem. This paper combs the related theory of agency theory firstly, and then combines the case to analyze the relative theories, and finally suggest recommendations as to how the issues should be addressed.

The Effect of Audit Quality on a Firm’s Internal Information Environment: Evidence From Group Audits

Many U.S. corporations operate internationally. For instance, S&P 500 firms generate approximately 29 percent of their sales in foreign markets (Brzenk 2018). Multinational corporations (MNCs) rely on information about their operations to allocate resources. This information is dispersed within the firm, which could lead to internal information asymmetry (IIA) between executives and divisional managers. Meanwhile, audits of MNCs are challenging and parts of these audits are sometimes outsourced to local foreign auditors who have no experience serving as opinion-issuing auditors for U.S. issuers. We examine whether involving such auditors affects MNCs’ internal information environments. We find that, relative to a matched control sample, SEC issuers employing inexperienced auditors have higher IIA and lower internal capital allocation efficiency. Together, the associations we document extend prior literature by providing some evidence that audit quality matters not only to a firm’s external financial statement users but also its internal users.

Clarity Begins at Home: Internal Information Asymmetry and External Communication Quality

ABSTRACTThis paper investigates the effect of internal information asymmetry (IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company's stock (DIFRET). Numerous validation tests indicate that DIFRET indeed captures the information asymmetry between divisional managers and top managers. In our primary tests, we find that DIFRET is associated negatively with the accuracy, bias, specificity, and frequency of management forecasts. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET. Our results, thus, suggest that external communication quality suffers when the information asymmetry between divisional managers and top managers is more severe.

Clarity Begins at Home: Internal Information Asymmetry and External Communication Quality

This paper investigates the effect of internal information asymmetry (hereafter IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company’s stock (DIFRET). Firms with higher DIFRET issue less accurate management forecasts that also exhibit greater pessimistic bias and lower specificity. Management forecasts are also less frequent among firms with higher DIFRET. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET, and weaknesses in internal control systems are particularly detrimental for the quality of both management forecasts and financial statements when DIFRET is higher. Our results are robust to controlling for endogeneity and cannot be attributed to restrictions on top managers’ insider trading.

Internal Information Asymmetry, Internal Capital Markets, and Firm Value

We examine the effects of internal information asymmetry between corporate headquarters and division managers on internal capital market efficiency and firm value. Using a novel measure of internal information asymmetry − the differential insider trading profit between division managers and top executives, we find a negative relation between internal information asymmetry and both internal capital market efficiency and firm value. These relations are more pronounced for firms with weaker corporate governance. Higher internal information asymmetry also associates with a greater probability of divesting and with more positive shareholder wealth effects from refocusing events.

CEO's use of financial and non-financial performance measures: Manufacturing companies in Mauritius and Australia compared

It is contended in a body of management accounting literature that financial performance measures are being rendered less relevant than non-financial measures in the management of companies. Such a management trend towards non-financial performance measures is particularly applicable to manufacturing companies due to the prevalence of technological change and customer-focused strategies. This crosscountry empirical study ranks and categorizes financial and non-financial measures used by CEOs of manufacturing companies in a developed country, Australia, and a developing country, Mauritius. It also gives evidence of contingency and agency factors influencing the relative reliance of CEOs on such measurement categories. The analysis is confined to 24 quantitative measures (12 financial and 12 non- financial). Contingency and agency theories are invoked to consider the impact of production technology, perceived environmental uncertainty and information asymmetry on the CEOs' extent of use of financial and non-financial performance measures. Through data from a questionnaire survey of CEOs, drawn from Australian and Mauritian manufacturing companies, results reveal considerable differences between the countries in CEO's reliance on financial versus non- financial measures. Taking the combine countries' sample, factor analysis of CEO's usage patterns results in five categories of measures. Hypotheses about the impact of contingency and agency factors on these measurement categories are tested. These tests indicate that the extent of use of performance measurement categories by CEOs is driven to some extent by environmental uncertainty and technological change, but not by internal information asymmetry.

The decision to outsource IS processing under internal information asymmetry and conflicting objectives

The central management's decision to outsource an organization's information processing to an external supplier is studied. The internal computing resource is represented by a queuing model; its manager has private information about the department's cost and has objectives that may differ from those of the organization. Outsourcing decision rules are derived for both the cost center and profit center organizational forms for the internal department. With a cost center, the IS manager must report on the department's cost parameter, which models his or her private information, in order for the central management to make its decision; a mechanism design approach is used to ensure truthful reporting. The decision is shown to be quite complex, depending in part on the shape of the long‐run marginal cost function for the internal department, thus requiring considerable knowledge on the part of the central management. Full and no outsourcing are the most frequent outcomes, but partial outsourcing is optimal in o...