Internal Information Quality Research Articles

Internal Information Quality and Corporate Social Responsibility Performance: An Analysis of CSR Strengths and CSR Concerns

ABSTRACT Our study investigates whether the quality of information available within firms promotes corporate social responsibility (CSR) performance. Using different measures of internal information quality, we find that internal information quality is positively associated with CSR strengths, which are discretionary in nature, and negatively associated with CSR concerns, which are compliance oriented. We find that the positive association between internal information quality and CSR strengths is stronger in settings with internal information asymmetries due to greater cash flow volatility, a larger number of employees, or a broader geographic footprint. We also find that the negative association between internal information quality and CSR concerns is stronger in compliance settings where there are internal information asymmetries linked to year-over-year increases in concerns. Our results suggest that organizational practices that improve a firm’s internal information environment will likely enhance CSR performance by promoting CSR strengths and diminishing CSR concerns. Data Sources: Data are available from the public sources cited in the text. JEL Classifications: M14; Q56; M41; D8.

Trade Secret Protection and the Integration of Information Within Firms

We examine the effect of trade secret protection laws on internal information integration (i.e., the extent to which economic agents are provided with access to decision-relevant information from other economic agents within a firm). We argue that stronger trade secret protection laws increase firms’ internal information integration because they reduce the proprietary costs of information leakage. To test our prediction, we measure a firm’s internal information integration by the share of its sites integrated into its enterprise management system. Exploiting the staggered adoption of trade secret protection laws via the Uniform Trade Secrets Act (UTSA), we find that these laws increase firms’ internal information integration. This effect is stronger (weaker) for firms with higher proprietary costs (coordination benefits). Further, we provide evidence that the UTSA-induced increase in internal information integration translates into improvements of firms’ internal information quality and decision-making quality. Taken together, our results enhance the understanding of the economic trade-offs shaping firms’ internal information environment. This paper was accepted by Ranjani Krishnan, accounting. Funding: S. Bormann and K. Hombach gratefully acknowledge funding from Deutsche Forschungsgemeinschaft (DFG, German Research Foundation) [Grant Project-ID 403041268–TRR 266 Accounting for Transparency]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03484 .

Data analytics strategy and internal information quality

AbstractI examine whether a strategic focus on data analytics is associated with improvements in firms' internal information quality. Using textual analysis of firm disclosures to identify a data analytics strategy, I first document that firm, leadership, and operating environment characteristics are all important determinants of the decision to adopt a data analytics strategy. I next use operating and financial reporting outcomes to infer whether a data analytics strategy improves internal information quality. I find that a data analytics strategy is associated with enhanced operating efficiency, as adopting firms invest and utilize existing resources more efficiently. I also find that a data analytics strategy is associated with more accurate management forecasts. These results, collectively, are consistent with a data analytics strategy improving firms' internal information quality. Lastly, I corroborate and extend my findings with job postings data, and the results suggest that firm leadership signals their support for data analytics initiatives through disclosure.

Lead Independent Directors and Internal Information Environment

ABSTRACTResearch Question/IssueThis study explores the relationship between the presence of a lead independent director (LID) and firms' internal information environment. LIDs are elected independent members of the board who perform key duties for the independent directors and the board, including reviewing and approving board meeting agendas, chairing non‐executive board meetings, and acting as a liaison between the CEO and other independent directors. We hypothesize that LID presence lowers information barriers between the CEO and the rest of the board members, enabling more rapid information acquisition and integration and enhancing the internal information environment of the firm.Research Findings/InsightsUsing a sample of US publicly listed companies from 2001 to 2019, we document that LID presence on the board is positively associated with proxies of internal information quality that reflect better information acquisition and information integration: accuracy and precision of management earnings forecasts, speed of earnings announcement, and absence of material weaknesses in internal controls. These results are robust to alternative model specifications, including entropy balancing, Heckman two‐step correction for self‐selection bias, firm fixed effects, and placebo tests. Further analyses suggest that LIDs with financial expertise and audit committee memberships are more effective in positively influencing internal information quality. We also show that LID presence is positively associated with several proxies of external information quality.Theoretical/Academic ImplicationsWe build on agency theory to argue that LIDs improve internal information quality by reinforcing the information quality benefits of unified leadership while mitigating potential compromises in information quality arising from entrenchment. Similarly, we use arguments emanating from the novel strategic leadership systems theory to posit that a LID appointment facilitates the tasks of the CEO and the board, enhancing the effectiveness of both groups in their respective roles: the CEO in making operating and investment decisions and the board in strengthening oversight while bringing cohesion in their shared role of strategy visioning and implementation.Practitioner/Policy ImplicationsOur findings suggest that there is scope for shareholders to consider LID appointments as an addition to their firms' corporate governance structures to enhance the internal information environment and decision‐making efficiency. Policymakers can also encourage LID appointments on the board when promoting best practices in corporate governance through regulatory guidelines.

The power of good corporate governance in activating the impact of internal information quality on tax savings

PurposeThis paper examines the moderating effect of good corporate governance on the association between internal information quality and tax savings.Design/methodology/approachThis study uses a quantitative approach. It employs an Australian sample of analysis composed of 1,295 firm-year observations from the period 2017 to 2021. Data relating to corporate governance are hand-collected from the annual reports.FindingsBased on the result of the analysis, this study demonstrates that the interaction between corporate governance and quality of internal information is positively associated with tax savings. Superior corporate governance is critical in activating the effect of internal information quality on tax savings. This finding is robust to a battery of robustness checks and additional tests.Research limitations/implicationsThis examination utilizes only publicly traded companies from one developed country.Practical implicationsFor the company management, an effective governance structure must be at the top because it will determine the development of all other areas. This study emphasizes the need to continuously improve the effectiveness of corporate governance practices. For long-term investors, an important indicator that can be considered in assessing the “safety” of a company’s tax strategy is its corporate governance aspects. For regulators, this study is expected to assist regulators in creating a more adequate corporate governance implementation and disclosure package to be implemented by corporations in the future.Originality/valueThis study provides new evidence on a crucial construct that can strengthen the relationship between internal information quality and tax savings.

Data Analytics Strategy and Internal Information Quality

Data Analytics Strategy and Internal Information Quality

“Just BEAT it” do firms reclassify costs to avoid the base erosion and anti-abuse tax (BEAT) of the TCJA?

This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company's location to provide evidence that firms reclassify related-party payments to avoid the BEAT. This effect is stronger in firms with greater pre-TCJA income shifting incentives. We estimate a $6 billion aggregate reduction in U.S. taxes for our sample firms in 2018. We also examine the consequences of reclassifying related-party payments and find some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT. These findings help explain observed BEAT collection shortfalls, contribute to the current policy debate about international tax reform, and document spillover effects of tax policy.

Processing inflation news: A discussion of Binz, Ferracuti, and Joos (2023)

Binz, Ferracuti, and Joos (2023) examine whether better internal information systems can mitigate the association between inflation and investment. According to Real Business Cycle models, inflation should not impact real decisions like investment, yet empirically the two are positively related. Lucas (1972) theorizes that imperfect information can cause agents to rationally extrapolate from their local set of information to make conclusions about what is happening in aggregate. Motivated by this model, the authors argue that better internal information systems allow managers to disentangle firm-level real shocks from nominal shocks. My discussion evaluates the measurement of internal information quality and questions how distinct it is from external information quality. Next, I relate the findings to a growing literature that examines how individuals and firms form economic expectations. Finally, I consider whether and how these findings can inform policy.

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.

Investment, inflation, and the role of internal information systems as a transmission channel

We examine whether the quality of firms' internal information systems influences the relation between inflation shocks and corporate investment, as posited by imperfect information models. Inconsistent with RBC models’ prediction that nominal variables (e.g., inflation) do not affect real variables (e.g., corporate investment) but consistent with the presence of information frictions, we first document a positive relation between inflation shocks and firm-level investment. Next, we show that higher internal information system quality, measured through responses to the World Management Survey, mitigates the positive relation between inflation shocks and firm-level investment. This result suggests that internal information quality serves as a channel through which aggregate-level nominal variables affect firm-level real variables. We then document that firms with higher internal information system quality make relatively more efficient investment decisions following inflation shocks. Our inferences are robust to using the 8th EU Company Law Directive as a shock to internal information system quality and to several additional tests.

Internal information quality and financial policy peer effects

This paper investigates how firms' internal information quality (IIQ) influences the peer effects of their financial policies. Using earnings announcement speed and insider trading profitability difference as measurements, we find that when IIQ is low, firms are more likely to change their leverage following a similar change made by peer firms in the same industry. Our further analysis shows that this mimicking behavior hurts firms' operating performance, and is more prevalent when firms are also characterized by poor corporate governance. Overall, our results indicate that poor information quality could amplify the agency problem, therefore leading to stronger peer effects in corporate financial policies.

R&D spending intensity of private vs public firms: the role of cash flow, leverage and information quality

PurposeThis study provides a large sample comparison of research and development (R&D) spending intensity in private and public firms and the extent to which these firms' unique characteristics affect their R&D spending rate.Design/methodology/approachThe study compares both private and public data from UK firms for the period 2006–2016, generating a total matched 232,029 firm-year observations, and applies a probability model technique to our large panel datasets.FindingsThe authors uncover that private firms show lower R&D spending intensity compared to their public counterparts. The authors evidence also shows that privately owned firms in the technological (non-technological) sector display higher (lower) probability of R&D spending intensity. Compared with public firms, the authors further observe that the intensity of private firms' R&D spending increases with higher internal cash flow, leverage and industry information quality. The authors results remain robust to alternative econometric models.Research limitations/implicationsDespite the findings of this study, the authors would like to point out that the use of a single country's data limits the generalisability of our findings. Thus, future studies may also consider extending this study across multiple countries.Practical implicationsA key implication of our study is that private firms are more likely to finance R&D intensity from the internally generated cash flow compared to the public ones. This stems from the fact that private firms are more likely to experience higher costs in raising external finance for innovative activities than public firms. Thus, easy access to funding for private firms is vital for enhancing R&D activities of the private firms.Originality/valueBy combining both private and public firms' datasets, the authors are able to provide new evidence to suggest that the intensity of private firms' R&D spending is dependent on internal cash flow, leverage and the industry information level. In fact, to the best of the authors’ knowledge, this is the first study that explores these relationships.

Pengaruh Kepemilikan Saham Asing, Kualitas Informasi Internal, Publisitas CEO, ROA, Leverage dan Ukuran Perusahaan terhadap Penghindaran Pajak

The purpose of this study is to determine the effect of foreign share ownership, quality of internal information, publicity of chief executive officer, return on assets, leverage and company size on tax avoidance in mining companies listed on the IDX from 2010 to 2018. Analytical tools used in This study is a multiple linear regression with tax avoidance as measured by dividing the amount of tax paid with profit before tax which is the dependent variable and six independent variables, namely foreign share ownership as measured by dividing total foreign shares by total shares outstanding, quality of information. internal which is measured by the number of days from December 31 to the date of publication of the company's annual financial statements, CEO publicity is measured through google trends, ROA is measured as a percentage of the ratio between net income after tax and total assets, leverage is measured by n divide total debt by total assets, and firm size is measured by the log of total assets. The data used is secondary data obtained from mining financial reports listed on the Indonesia Stock Exchange (BEI), with documentation techniques. The results of data processing obtained model Y = 0.329 - 0.082 KSA - 0.002 KII + 0.001 PCEO + 0.118 ROA + 0.107 LEV + 0.011 UKP + e. Partially, the results of the t test show that the variables of foreign share ownership, internal information quality, CEO publicity, leverage, and company size have an effect on tax avoidance, but return on assets has no effect on tax avoidance. The analysis results show that the tax avoidance variable is influenced by the independent variable by 14%.

Retracted] Relationship between Capital Allocation Efficiency and Diversification Strategy from the Perspective of Internal Control

Based on the quality of internal control, this study discusses the impact of internal control quality on resource allocation in the internal capital market and how capital allocation efficiency affects strategic decision‐making. If the quality of internal control can be correctly evaluated and included into the management's strategic decisions, the enterprise can improve the efficiency of capital allocation and formulate an appropriate development strategy. Using panel data from the Shanghai and Shenzhen stock markets from 2013 to 2017, we investigate the relationship among overall internal control information quality, capital allocation efficiency, and enterprise strategic decision‐making. The results show that when the level of free cash flow is high, the incentive mechanism of corporate governance increases the possibility of diversification; the lower the quality of internal control information is, the more likely it is for enterprises to pursue diversification; improving the quality of internal control helps management to allocate internal resources reasonably. When the efficiency of capital allocation is high, it can effectively prevent diversification. This study contributes by revealing the mechanism of the impact of internal control quality on strategic decision‐making and expands the relationship between internal control and corporate strategic management.

Does Internal Information Quality Affect Corporate Procurement? Evidence from Purchase Obligation Engagements

Does Internal Information Quality Affect Corporate Procurement? Evidence from Purchase Obligation Engagements

Internal Information Quality and State Tax Planning*

ABSTRACTThis study examines the association between internal information quality and state tax planning. Prior literature documents a positive association between internal information quality and summary measures of tax avoidance. However, we know little about specific forms of tax planning and internal information quality. State tax planning is difficult because of the number of jurisdictions, variety of tax rules, variation of enforcement, and apportionment requirements. We find that internal information quality facilitates state tax planning and is most important when firms face more restrictive state tax laws and when domestic firms relative to multinational firms have international income shifting opportunities. Our results provide a baseline of the economic effects of internal information quality on different forms of tax planning. Understanding internal information quality's role in state tax planning is especially relevant as countries propose to modify international tax rules to mirror the state taxation format of a single‐entity system with apportionment.

Protection of trade secrets and corporate tax avoidance: Evidence from the inevitable disclosure doctrine

In this study, we investigate the effect of the protection of trade secrets through the adoption of the inevitable disclosure doctrine (IDD) by US state courts on corporate tax avoidance. We suggest a positive impact of IDD adoption on tax avoidance, because IDD adoption reduces information transparency by increasing the benefit of nondisclosure and, hence, creates greater opportunities for firms to engage in more aggressive tax avoidance activities. Based on a large sample of US firms between 1977 and 2011, we find a significant increase in tax avoidance for firms in states that have adopted the IDD, compared with firms in states that have not adopted it. We further show that the impact of the IDD on corporate tax avoidance is more salient in firms with lower internal information quality. Our findings have important implications for both investors and regulators.

Information Quality and Workplace Safety

ABSTRACTThis paper examines the effect of internal information quality on workplace safety. Using establishment-level data on workplace injuries from the Occupational Safety and Health Administration (OSHA) and employing a strict fixed-effects structure, we show that higher information quality is associated with significantly lower work-related injury rates. Further investigation reveals that the effect is stronger when more decision rights reside in headquarters, weaker when employees have greater bargaining power, and weaker when firms are subject to financial constraints. Our findings are robust to the use of two plausibly exogenous shocks and other robustness checks. Our study suggests an important economic consequence of information quality not examined by prior literature.

The Inevitable Disclosure Doctrine and Corporate Tax Avoidance

In this study, we investigate the effect of the protection of trade secrets through the adoption of the inevitable disclosure doctrine (IDD) by US state courts on corporate tax avoidance. We suggest a positive impact of IDD adoption on tax avoidance because IDD adoption reduces information transparency by increasing the benefit of nondisclosure and, hence, creates greater opportunities for firms to engage in more aggressive tax avoidance activities. Based on a large sample of US firms between 1977 and 2011, we find a significant increase in tax avoidance for firms in states that have adopted the IDD, compared with firms in states that have not adopted it. We further show that the impact of the IDD on corporate tax avoidance is more salient in firms with lower internal information quality. Our findings have important implications for both investors and regulators.

The Effects of Artificial Intelligence on Firms’ Internal Information Quality

The Effects of Artificial Intelligence on Firms’ Internal Information Quality