Level Of Asymmetric Information Research Articles

Does asymmetric information affect firm's financing decisions?

PurposeThe authors examine the impact of asymmetric information on firm's financing decisions, the feedback effect of changes in capital structure on the level of asymmetric information, and the speed of adjustments in capital structure on its target leverage.Design/methodology/approachThe authors extract the data on 280 non-financial firms listed in the Pakistan Stock Exchange (PSX) from the DataStream. The authors implement the generalized method of moments (GMM), complemented by the fixed effect model (FEM) to estimate the model coefficients.FindingsThe authors find that asymmetric information significantly affects the financing decisions; and that on average, firms adjust 26% of the total debt toward their target capital structure. The negative effect from the difference between the observed and target changes in leverage on asymmetric information confirms that capital structure changes act as a signal for future profitability and helps the management to lower its level of asymmetric information.Originality/valueThe findings offer fresh insight into the effect of asymmetric information on financing decisions, as well as the speed of adjustment of capital structure toward its target leverage, in the context of the firms working in emerging markets like Pakistan. To the authors’ best knowledge, this is the first study to investigate the impact of asymmetric information on financing decisions that incorporate firm's age, size and the global financial crises 2007–2008. The authors construct an asymmetric information index using both accounting and finance measures of asymmetry.

Corporate Divestiture Decisions and Long-Run Performance

We examine the post-divestiture long-run performance of two different choices of corporate divestiture, asset sell-offs versus equity carve-outs, and find that the choice of divestiture methods has important implications for the post-divestiture long-run performance. Our findings show that the post-divestiture long-run abnormal returns of sell-off parents are significantly higher than those of the carve-out parents. Furthermore, we find a positive relationship between the post-divestiture long-run returns and the diversification discount. The effect of the diversification discount is weaker for divesting parents with higher levels of R&D. Our results also provide evidence that a firm’s pre-divestiture number of segments, its unrelatedness to the divested unit, and its level of asymmetric information are positively related to the probability of choosing the asset sell-off method.

Informational Efficiency in Securitization after Dodd-Frank

Abstract We analyze how Dodd-Frank-mandated risk retention affects the information investors extract from issuers’ retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we provide a model showing that signaling can occur by varying the retention structure. The model is consistent with spreads being empirically lower in deals with a purely first-loss retention structure. A stated concern of rulemakers is asymmetric information. However, we show that, post-crisis, the level of asymmetric information in this market is quite low.

ANALISIS PENGARUH CORPORATE GOVERNANCE, RELATED PARTY TRANSACTION, KONSENTRASI KEPEMILIKAN DAN NILAI PERUSAHAAN TERHADAP TINGKAT ASIMETRI INFORMASI

This research examines to analyze the impact of Corporate Governance, Related Party Transaction, Ownership Concentration, Corporate Value On The Level of Asymmetric Information .The results of this study indicate that (1) Corporate governance is no negative influence on to increase information asymmetry. (2) Related party transaction is no positive influence to increase information asymmetry(3) Ownership concentration is positive influence to increase information asymmetry (4)The corporate value is no negative influence to increase information asymmetry

Informational Efficiency in Securitization After Dodd-Frank

We analyze how Dodd-Frank mandated risk retention affects the information investors extract from issuers' retention choices in the CMBS market. We show that the required retention level is both binding and stringent. Although this implies issuers cannot signal using the level of retention, we provide a model showing that signaling can occur by varying retention structure. The model is consistent with spreads being empirically lower in deals with a purely first-loss retention structure. A stated concern of rulemakers was asymmetric information. However, we show that, post-crisis, the level of asymmetric information in this market is quite low.

Optimal demand in a mispriced asymmetric Carr–Geman–Madan–Yor (CGMY) economy

We employ a simple numerical scheme to compute optimal portfolios and utilities of informed and uninformed investors in a mispriced Carr–Geman–Madan–Yor (CGMY) Levy market under information asymmetry using instantaneous centralized moments of returns (ICMR). We also investigate the impact on investors’ demand for stocks and indices at different levels of asymmetric information, mispricing, investment horizon, jump intensity, and volatility. Our simulations not only confirm that uninformed expected demand falls as information asymmetry increases but also offer strong evidence that informed expected demand behaves in a similar manner. In particular, expected demand of informed investors falls whenever information asymmetry exceeds 50%. The investor that demands more of the risky asset maintains that position over the entire investment horizon at each level of mispricing and information asymmetry. The absolute difference in expected demand between the uninformed and informed investors increases with the investment horizon, but decreases with the level of information asymmetry.

Credit Information System in Albania

The booming lending period and many lenders (16 banks and 21 non-bank financial Institutions in Albania) brought about unprecedented competition in credit markets within Albania. Economists usually view lending and competition favorably, but in Albania resulted in a number of unforeseen non-performing loans. Findings report increased problems of borrower over-indebtedness, reduced loan repayment incentives, and growing debts for lenders1. The weakening performance of lenders is due in part to the absence of information sharing in these markets. Because growing numbers of lenders (banks and non-bank financial Institutions in Albania) increase the level of asymmetric information between lenders, credit information systems (often called credit reporting bureaus or credit bureaus) can play a crucial role towards improving credit market performance and, in turn, credit access for the poor. Increases in formal sector lending among the poor have created a need for credit information systems that provide potential lenders with borrower information. Improved screening affects from the system causes the level of non-performing loans to decline. In this paper we will present effects of a credit information system to be implemented in Albania. The weakening performance of lenders is due in part to the absence of information sharing in these markets. Because growing numbers of lenders (banks and non-bank financial Institutions in Albania) increase the level of asymmetric information between lenders, CISs can play a crucial role towards improving credit market performance and, in turn, credit access for the poor.

Stock Market Reaction to CEO Turnover Announcements and Information Asymmetry

This paper analyzes market reaction to CEO turnover announcements in the presence of information asymmetry. Using hand-collected data of 750 CEO turnover announcements made between 2004 and 2014, I find that the market reaction to a turnover announcement depends on the type of turnover and the level of asymmetric information between the firm and its investors. If the type of turnover is forced, the market reaction is negatively related to the level of asymmetric information. If the type of turnover is voluntary, the market reaction is weakly positive and does not depend on the level of asymmetric information. I also find that in case where information asymmetry is high, companies attempt to present forced turnover as voluntary and this behavior leads to a less negative market response. Overall, my results suggest that firms act strategically when disclosing information on CEO turnover to avoid a negative market reaction.

Ambiguity About Informed Trading in Dealer Markets - An Experiment

We use an economic experiment to examine the impact of an ambiguous level of asymmetric information on the behavior of security dealers. Specifically, we distinguish three types of uncertainty with respect to informed trading-risk, compound risk, and ambiguity - for both a monopoly and a duopoly market setting. We find that dealer's bidding behavior is less aggressive under an ambiguous than under a risky level of informed trading. Additionally, we find that the stochastic nature of choice can hinder our ability to observe a difference in market outcomes among the risky, the compound, and the ambiguous environments.

Different degrees of informational asymmetry on job markets and its impact on companies’ recruiting success

Based on a large survey of German companies, we investigate the influence of job characteristics on the recruiting success on labor markets with different degrees of informational asymmetry. We cluster companies’ recruiting channels in those with low (internal job markets and employee referrals) and high (job advertisements, the Federal Employment Agency and headhunters) degrees of informational asymmetry. We provide evidence that monetary aspects are important when quality aspects of the job and the company are not directly observable by job applicants. However, if recruiting channels are used where the level of asymmetric information is lower because applicants have more reliable information about job and company characteristics, the quality attributes of a workplace, such as flexible work times or a high job responsibility, become influential on the recruiting success. Finally, our results show that applicants with access to more information about the quality aspects of a job also seem to be in a better position to evaluate the information given with regard to their credibility.

International Evidence on Industrial Diversification and Asymmetric Information across Different Ownership Structures

This paper examines the effect of industrial diversification on asymmetric information based on global samples. We use the international data from 28 countries in America, Europe and Asia during the period between 2000 and 2006 to test how corporate diversification affects the degree of asymmetric information across different ownership structures. The empirical results show that diversification will raise information asymmetry. In general, the increase of ownership of managing owners raises the levels of asymmetric information, but the marginal effect varies across the ownership structure.For the marginal effect of diversification, the level of asymmetric information is significantly higher for the diversified firms when the ownership of managing owners is lower than a certain level (10% or 30%). This suggests that there are more entrenchment effects for diversified firms. In contrast, the level of asymmetric information is significantly lower for the diversified firms when the ownership is more than a certain level (30%). In this case, there are alignment effects.

Asymmetric Information and the Medium of Payment in US Takeover Bids

We investigate whether asymmetric information affects the choice of the medium of payment (pure equity vs. pure cash) in U.S. takeover bids during the 1986-2008 period. To this end, we combine proxies for asymmetric information with proxies for the financial characteristics of both the bidding and the target companies in the pre-bid period. Our novel results indicate that acquirers with a high level of asymmetric information, who are either overvalued or have high growth opportunities, are more likely to make a pure equity offer. Acquirers with the opposite characteristics are more likely to make a pure cash offer. These results are largely consistent with Myers and Majluf’s hypothesis (JFE, 1984). Targets’ asymmetric information does not seem to significantly affect the mode of payment. Also, in line with the existing literature, the probability of a pure equity offer is positively related with the level of the targets’ growth opportunities and/or their overvaluation, while the probability of a pure cash offer is positively related with the profitability and liquidity of the acquirers.

Payout and asymmetric information

This article investigates the effects of payout policy on the level of asymmetric information in the market for common equity shares. The results suggest that higher dividend levels are associated with lower price impact, both as a percentage of economic value and as a percentage of the spread. And greater share repurchase ratios are associated with lower price impacts as a percentage of the spread. Overall, the results suggest that managers may have more than the choice of market settings as a means to improve the quality of the market for their stock and the efficiency of price.

Determinants of Dividend Smoothing: Empirical Evidence

We document the cross-sectional properties of corporate dividend smoothing policies and relate them to extant theories. We find that younger, smaller firms, firms with low dividend yields, more volatile earnings and returns, and firms with fewer and more disperse analyst forecasts smooth less. Firms that are cash cows, with low growth prospects, weaker governance and greater institutional holdings smooth more. We also document that dividend smoothing has steadily increased over the past 80 years, even before firms began using share repurchases in the mid-1980s. Taken together, our results suggest that dividend smoothing is most common among firms that are not financially constrained, face low levels of asymmetric information, and are most susceptible to agency conflicts. These findings provide challenges and guidance for the developing theoretical literature.

Who Smoothes Dividends?

This paper examines the relation between dividend smoothing and asymmetric information between managers and investors. We find that the extent of dividend smoothing are negatively related to the measures of information asymmetry. Firms with higher levels of asymmetric information have a higher propensity to smooth their dividends. These results imply that a firm's information environment affects its dividend smoothing decision.

Underwriter Certification: Evidence from Seasoned Equity Issues

This proposal examines the relationship between certification and the reputation of underwriters. Based on seasoned equity offers between 1976 and 2005, in the first part of this proposal I document a positive abnormal announcement return associated with the selection of an underwriter that is more reputable than expected given publicly available firm and issue characteristics. Having an issue underwritten by a surprisingly more reputable underwriter is associated with a durable decrease in bid-ask spreads lasting about three quarters. This effect and the aforementioned one on announcement returns are both stronger with firms that have higher levels of asymmetric information ahead of the offering. These results are consistent with the quality of the underwriter being directly related to the often mentioned certification effect, consisting of a reduction in information asymmetry. In the second part of this proposal, I analyze the firm's use of a commercial vs. an investment bank in equity underwriting, while considering the underwriter's reputation and the endogeneity of the fees. Firms with higher levels of asymmetric information are more prone to have their equity issues underwritten by a commercial bank. The firms react to the fees that would be charged by the different bank types and reputations. After controlling for the underwriter's reputation, the effect on announcement returns of a surprise announcement of being underwritten by a commercial bank is directly related to the firm's level of information asymmetry. This is consistent with the commercial banks' competitive advantage in certification residing in economies of scope/ information transfers, and the investment banks' relative strength consisting of an outsider certification capability that is less variable across the spectrum of firms transparency.

A Challenger to Competing Market Makers: The Regulated Monopolist Specialist

We consider a financial market where competing market makers are unable to guarantee an optimal level of liquidity due to asymmetric information problems. We introduce a monopolist specialist in the market and we show that market liquidity can be improved only if the specialist is regulated. Then, we compare two different regulatory authorities: a self regulatory organization (SRO) and an external regulator (EA). A trade-off exists between the two regulatory systems: on the one side, the EA can costly redistribute resources from the financial market to the society and vice versa, so she owns potentially unlimited resources to pursue her policy. On the other side, the SRO can transfer resources between states of nature at no costs, but her policy must break-even, since she owns no private resources. We show that the EA performs always better than the SRO in welfare terms. However, the regulated specialist is not always able to guarantee a deeper market than competition. His effectiveness depends negatively on both the costs of public funds and the level of asymmetric information on the market.

Dividend Initiations and Asymmetric Information: A Hazard Model

AbstractThis paper investigates the dynamics of dividend policy using a hazard model. Specifically, the paper examines dividend initiations for a sample of firms that went public between 1990 and 1997. These dividend initiations are examined in the context of an alternative explanation based on the pecking order theory. The results indicate that the probability or the hazard rate of a dividend initiation is negatively related to both the level of asymmetric information and growth opportunities and positively related to the level of cash flow. These results are consistent with a pecking order explanation but inconsistent with a signaling explanation.

Asymmetric Information and Corporate Derivatives Use

We investigate the relationship between derivatives use and the extent of asymmetric information faced by the firm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use of derivatives and the extent of derivatives usage is associated with lower asymmetric information. Specifically, for firms using derivatives (notably currency derivatives) we find that analysts' earnings forecasts have significantly greater accuracy and lower dispersion. These findings support the conjectures of DeMarzo and Duffie (1995) and Breeden and Viswanathan (1998) who argue that hedging reduces noise related to exogenous factors and hence decreases the level of asymmetric information regarding a firm's earnings.

The Debt Maturity Structure of Small Firms

Smallfirms differ from large in taxability, ownership, flexibility, industry, economies of scale, financial market access, and level of information asymmetry. We investigate the determinants of firms' choice of the maturity structure of debt. We find that firms' maturity of assets, capital structure, and probability of default are statistically and economically important in the choice of debt maturity. We find little evidence that smallfirms' growth options, level of asymmetric information, and tax status affect debt maturity choice. Although many studies examine the choice between debt and equity in financing a firm, there has been little research on other features of debt financing, including its maturity structure. In this paper, we present an empirical investigation of the maturity structure of small-firm debt. Our work extends prior empirical research on debt maturity to a new and economically prominent group of firms. But more important are the implications for theory building on debt maturity. are not larger scaled down; they differ in basic respects that influence the choice between short- and long-term debt financing. Investigating firms' debt maturity choices contributes to our understanding of this choice. There is a substantial difference between what financial research literature calls a and what this term means elsewhere. Financial research typically investigates with publicly traded equity because many important research questions concern the effect of a firm's decisions on the market value of equity. Small firms are usually defined as the group (decile, quartile, or quintile) of publicly traded with the smallest sales or market capitalization. However, even the smallest of traded is large relative to most of the in the economy. Researchers outside finance identify as small based on their number of employees or sales volume. These are proxies for economies of scale, capital market access, management and ownership structure, and other factors that differentiate between large and (Osteryoung, Pace, and Constand, 1995; Osteryoung and Newman, 1993). One designation for a small firm is one with fewer than 500 employees; such provide 53% of employment in the US, produce 47% of total sales revenues, comprise over 95% of the total number of firms, and are responsible for most of the employment growth in recent years (USGPO, 1996). The sample in our research are much smaller and concentrated in different industries from the larger traded studied in prior research on debt maturity. The average sales of the in our study are only $3 million per year. Most of our sample are retailers or service firms, rather than manufacturers. About one-half are not corporations, and virtually none are publicly traded.