Level Of Information Asymmetry Research Articles

The nexus of overnight trend and asset prices in China

Leveraging the systematic variations in investor clientele within a day, we validate an adapted version of the Hong and Stein (1999) model that addresses the consequences of slow information diffusion in China. The model predicts that overnight returns, rather than total returns, strongly forecast future returns, as informed overnight clientele underreact to value-relevant signals. Empirically, we establish a consistent overnight trend phenomenon: Firms with a strong overnight trend reliably outperform those with a weak overnight trend in the subsequent month. The phenomenon is more pronounced among stocks with higher levels of information asymmetry, valuation uncertainty, and relative mispricing. Furthermore, the overnight trend predicts positively firm fundamentals in the cross section.

Integrated Reporting, ESG Disclosure, Forecast Accuracy, and Firm Value: Profitability as Moderating Variable

Objective: This study investigate how the quality of IR and ESG disclosures can affect the level of information asymmetry and enhance legitimacy and signal about firm value. Theoretical Framework: IR will increase the company's transparency to stakeholders so that reduces the problem of information asymmetry and long-term business value creation. SDGs encourages organizations to pursue credentials by implementing ESG to increase corporate credibility. High profitability can provide positive signals that encourage managers to implement IR and submit ESG reports, thereby reducing information asymmetry and increasing firm value. Method: Based on data from the IDX database, this study analyses companies that are members of the LQ45 group. We have collected annual reports and sustainability reports for the period between 2013 and 2022. Results and Discussion: IR quality has a negative influence on FA and firm value, while ESG disclosure has a positive influence on FA and firm value. Profitability variable is able to strengthen the effect of IR quality and ESG disclosure on FA. Therefore, IR quality and ESG disclosures have a strong influence on FA. Research Implications: Theoretically, this study’s result strengthen the study of legitimacy and institutional theories in explaining the relationship between IR quality and sustainability disclosures on information asymmetry and firm value in the long run. Practically, it highlights the importance for managers to enhance IR and ESG disclosures, thereby promoting corporate transparency and accountability. Originality/Value: This considers profitability variables to understand the motives and drivers of managers to implement integrated reporting formats and deliver sustainability reporting.

Evaluating Board Characteristics’ Influence on the Readability of Annual Reports: Insights from the Egyptian Banking Sector

This study aims to examine the impact of board characteristics (BCs) on banks’ annual reports readability (BARR). Further, it examines whether bank size (BS) moderates the association between BC and BARR. The study employs a sample of 208 bank-year observations from both listed and non-listed banks in the Egyptian stock exchange (EGX), utilizing data spanning from 2016 to 2023. The study employs a random-effect regression model to test the hypotheses and discuss the results. The results suggest that BARR has a significant association with board meetings, gender and cultural diversity. Furthermore, BS played a moderating role in determining the association between BCs and BARR, supporting the second hypothesis. The findings show that the BCs and disclosure quality differ for banks of varying sizes. The findings have practical implications for the Egyptian banking sector, highlighting that board structure is critical to transparency and maintaining public trust. Additionally, the results focus policymakers’ attention on standardizing the contents and structure of banks’ annual reports, with the aim of reducing managers’ manipulation of disclosures and reducing the level of information asymmetry between stockholders, as suggested by the agency theory.

Signaling Effects in AI Streamers: Optimal Separation Strategy Under Different Market Conditions

The fusion of livestreaming e-commerce and AI technology is booming, and many firms have started to replace human streamers with AI streamers. Despite their popularity, the acceptance of AI streamers by consumers varies widely and the signaling effects of AI streamers still remain unclear. We build an analytical model and compare scenarios where the acceptance level is either exogenously given or endogenously determined, highlighting the implications for firms’ optimal separation strategy. Our findings suggest that in markets with moderate information asymmetry, using both price and acceptance level as joint signals can be more profitable for high-quality firms. Conversely, in highly asymmetric markets, firms must incur additional costs to distinguish their high-quality products, regardless of the signaling strategy employed. Our paper provides strategic insights for firms aiming to leverage AI streamers in diverse market conditions.

Picturing success: The informational role of visual cues in initial coin offerings

Visual cues are increasingly used in financial disclosures to improve information dissemination. While prior research has primarily focused on the informational value of linguistic attributes in financial disclosures, we draw on dual coding theory and investigate how infographics in disclosures affect fundraising success. Exploiting the high level of information asymmetry of Initial Coin Offerings (ICOs), we find that infographics positively influence the amount raised, particularly when the textual content is highly technical. We explore the mechanisms behind this result, showing that infographics are associated with improved third-party analyst ratings and reduced rating dispersion, which suggests that visuals help mitigate information asymmetry. Furthermore, qualitative, status summary, and startup-specific infographics further enhance fundraising efforts. Overall, visual cues significantly enhance the informational value of entrepreneurial financing disclosure, leading to greater funding outcomes.

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.

Climate change exposure and stock liquidity commonality: International evidence

Using a large international sample from 40 countries spanning the period of 2002 to 2022, this paper provides evidence of a significant and positive relationship between firm-level climate change exposure and stock liquidity commonality. We identify two channels through which this impact occurs: the financial constraints channel and the operational risk channel. Additionally, this paper reveals that the positive effect of climate change exposure on stock liquidity commonality is stronger for firms with higher levels of information asymmetry or weaker corporate governance. Furthermore, this study finds that country-level climate risk also contributes to higher stock liquidity commonality and that country-level climate risk and firm-level climate change exposure risk act as substitutes in increasing stock liquidity commonality. After addressing endogeneity concerns and conducting various robustness checks, our main findings remain unchanged.

Board sub-committee effectiveness, director attraction and director attrition: Do nomination and remuneration committees matter?

This study examines whether the effectiveness of board subcommittees is associated with director attrition and the attraction of new directors to boards. Using a sample of firms listed on the Australian Securities Exchange, we find that nomination and remuneration committee effectiveness is inversely associated with director attrition and positively related to new external directors joining boards. The results suggest the contribution of these subcommittees to improve corporate governance by strengthening the board's human capital through recruitment and retention of suitable talent. Furthermore, the influence of subcommittee effectiveness on attrition (attraction) is more pronounced in firms experiencing higher levels of information asymmetry, weaker governance quality and poorer performance. The results are robust to tests with alternative variables, entropy balanced matching, and additional controls. Overall, our findings show that improved governance through effective subcommittees helps maintain and enhance the human capital of boards.

Information disclosure, product market competition and payout policy

The extant literature studying the impact of information asymmetry and agency problems on corporate payouts found that a lower level of information asymmetry and agency problems contributes to higher corporate payouts. However, it is unclear through which corporate governance mechanisms would information asymmetry and agency problems be reduced, thereby affecting payout policies. In this paper, we examine how information disclosure, an internal corporate governance mechanism that reduces information asymmetry, and product market competition, an external corporate governance mechanism that mitigates agency problems, affect payout policies. Using a unique information rating scheme as a measure of information disclosure for Taiwanese public firms from 2005 to 2014 and the timeliness of financial reports as an alternative measure of information disclosure for Taiwanese public firms from 2005 to 2022, we examine the interactive effects of information disclosure and product market competition on payout policy. We find that information disclosure and product market competition positively affect firms' decisions to distribute dividends and repurchase shares. In particular, information disclosure increases dividend payouts only for firms in competitive industries. Our results suggest that governance mechanisms for information disclosure are more effective for firms in competitive industries.

Insider opportunistic trading through fast sales: Evidence from China

Using a sample of insider sales from firms listed on China's A-share market from 2010 to 2023, we provide robust evidence that insiders engage in fast sales when stocks have better pre-sale performance, compared to slow sales. Additionally, these fast sales predict lower abnormal returns in both the short and long term. Insider opportunistic trading through fast sales is more prominent in firms with high levels of information asymmetry and among insiders facing intense information competition. We find weak evidence that independent directors, institutional investors, and analyst coverage play a role in reducing such insider opportunistic trading. Finally, insider opportunistic trading through fast sales also predicts subsequent stock price crashes and extremely negative earnings news. Our findings help decipher the information content of insider sales in China's market.

Addressing the notion of trust around ChatGPT in the high-stakes use case of insurance

The public discourse concerning the level of (dis)trust in ChatGPT and other applications based on large language models (LLMs) is loaded with generic, dread risk terms, while the heterogeneity of relevant theoretical concepts and empirical measurements of trust further impedes in-depth analysis. Thus, a more nuanced understanding of the factors driving the trust judgment call is essential to avoid unwarranted trust. In this commentary paper, we propose that addressing the notion of trust in consumer-facing LLM-based systems across the insurance industry can confer enhanced specificity to this debate. The concept and role of trust are germane to this particular setting due to the highly intangible nature of the product coupled with elevated levels of risk, complexity, and information asymmetry. Moreover, widespread use of LLMs in this sector is to be expected, given the vast array of text documents, particularly general policy conditions or claims protocols. Insurance as a practice is highly relevant to the welfare of citizens and has numerous spillover effects on wider public policy areas. We therefore argue that a domain-specific approach to good AI governance is essential to avoid negative externalities around financial inclusion. Indeed, as a constitutive element of trust, vulnerability is particularly challenging within this high-stakes set of transactions, with the adoption of LLMs adding to the socio-ethical risks. In light of this, our commentary provides a valuable baseline to support regulators and policymakers in unravelling the profound socioeconomic consequences that may arise from adopting consumer-facing LLMs in insurance.

International Diversification and Stock-Price Crash Risk

Despite the recent proliferation of research on internationalization, little attention has been paid to understanding the reasons behind the decrease in firm value accompanying international expansion. By delving into the underlying mechanisms and applying the concept of agency theory to a sample of US firms spanning from 2000 to 2022, we posit that an increased level of information asymmetry in internationally diversified firms incentivizes managers to prioritize their own interests. To protect their careers, CEOs of internationally diversified firms often suppress bad news. This behavior can lead to the accumulation of negative news and heighten the risk of a stock-price crash. Furthermore, we propose that higher levels of international experience, enhanced monitoring effectiveness, and efficient investment practices will negatively moderate the positive relationship between internationalization and stock-price crash risk.

How does digital transformation affect corporate resilience: a moderation perspective study

ABSTRACT In the context of the accelerated development of the digital economy and the implementation of the innovation-driven development strategy, does digital transformation inevitably improve corporate resilience? Based on measuring the moderation of corporate digital transformation, this paper examines the dynamic relationship between digital transformation and corporate resilience using the theory of new structural economics and double machine learning methods. The results show that the more moderate the digital transformation, the higher the level of corporate resilience. Agency costs, financing constraints, and irrational decision-making bias constitute important influencing mechanisms. Further analysis reveals that the resilience-enhancing effect of moderate digital transformation is more pronounced among corporations with high levels of corporate governance, low levels of information asymmetry, more diverse executive backgrounds and in manufacturing corporates. The relevant findings of this paper provide guidance and decision-making references for promoting the high-quality development of corporates.

Peeking into Corporate Greenwashing through the Readability of ESG Disclosures

Faced with the widespread issue of greenwashing, there is a pressing need for an effective approach to assess the extent of corporate involvement in such hypocritical practices. This study aims to address this concern by examining the association between corporate ESG disclosures’ readability and greenwashing. We gauge the readability using a modified Fog Index and construct a company’s peer-relative greenwashing score based on data from third-party databases. The empirical analysis reveals a negative relationship between the level of corporate greenwashing and the readability of its ESG disclosures, suggesting that companies whose ESG disclosures are more readable are less likely to engage in greenwashing. This negative relationship is particularly pronounced in companies characterized by higher levels of information asymmetry. However, the relationship is weaker after 2018, when the “Code of Corporate Governance for Listed Companies” was implemented. In conclusion, our research highlights the significance of ESG disclosure readability in effectively conveying and predicting corporate greenwashing practices. This study provides valuable insights for investors seeking to evaluate corporate performance and make well-informed investment decisions.

Military Experience of Senior Executives and Business Credit Supply of Enterprises

This study is based on the data of Chinese A-share listed companies from 2005 to 2022 and empirically examines the relationship between senior executives' military experience and the supply of commercial credit by enterprises. The research findings suggest that senior executives with military experience can significantly enhance the level of commercial credit supply by the company. The mechanism analysis indicates that top executives' military experience promotes the provision of greater business credit through two pathways: mitigating the level of information asymmetry within the company and strengthening the effectiveness of internal controls. Heterogeneity tests reveal that the positive impact of top executives' military experience on the acquisition of commercial credit supply is particularly pronounced in eastern region companies as well as state-owned holding companies. This study addresses the existing research gap by shedding light on the specific effects and pathways of top executives' military experience in promoting the provision of business credit, thus enhancing our understanding of their personal traits and life experiences. Furthermore, it provides valuable insights for improving the evaluation system of commercial credit within enterprises.

The Effect of Profitability, Liquidity and Leverage Ratios on Internet Financial Reporting and Company Size as Moderating Variables During The Covid 19 Pandemic (An Empirical Study on the BEI Various Industries Sub-Sector)

Internet media has become a tool that provides a means for open company financial reporting as information for external parties because openness can reduce the level of information asymmetry that can occur in financial reports, so that it can accelerate company growth. The nature and characteristics of the internet which is easy to spread (pervasiveness), knows no borders (borderlessness), is timely (real time), low cost (low cost), makes disclosing information via the company website easier in finding all the necessary information related to the company, without having to incur high costs, Abdillah (2015). The development of the internet has created a new way of conveying company financial report information, namely using the Internet Financial Repoting (IFR) system, Yuli Kurniawati (2018). Every company has had many improvements in terms of company profits. Profitability is an indicator measuring management performance in managing company assets which can be shown by increasing profits that can be generated by the company. By indicating that the greater the company's profitability value, the company has good performance management. The liquidity ratio is an indicator of the level of a company's ability to pay short-term obligations. If the company is illiquid, there is a tendency for the company to experience bankruptcy. The ratio is prorated using the Current Ratio, which is about the comparison between current assets and current liabilities. The leverage ratio is a ratio that is an indicator of a company's capital structure. A high level of leverage can encourage management to carry out Internet Financial Reporting to take advantage of opportunities for good information from the company. Company size is a description of how big or small a company is, which can be measured by the size of the asset value, total sales, or the market value of the company's equity. Profitability and leverage influence the Internet Financial Report, while liquidity has no influence on the Internet Financial Report. Size can strengthen the influence of leverage on the Internet Financial Report, while size cannot strengthen the influence of profitability and liquidity on the Internet Financial Report

A configurative analysis investigating how new technology-based firms gain the first financing round

AbstractNew technology-based firms (NTBFs) present high levels of information asymmetry since knowledge base, the intangibility of assets, and appropriability issues are particularly pronounced. Investors experiment with difficulties in evaluating the quality of NTBFs and look into insights representing the venture's promises and outlooks, and NTBFs need to face limited financing opportunities. Therefore, information asymmetries and moral hazards may influence the financing system of NTBFs. Based on the signaling theory, we propose a configurative approach built on five accessible signals (founders’ education and work experiences, property rights, alliances, and size) to identify combinations of signals conducive to the NTBF reaching a first financial round. By adopting a configurative approach through the qualitative comparative analysis, we advance our understanding of the intricate dynamics between NTBFs and investors, shedding light on the complexity and interplay of various factors influencing the financing outcomes.

Regression for Asymmetric Information Problem: The Comparison of Different Methods

ABSTRACT In previous decades, seminal theories were advanced addressing the problems of asymmetric information. These scholarly works confirmed a significant positive correlation between insurance coverage and risk in insurance markets. We showed that when regression models were used to analyze the asymmetric information problem, the sample selection bias and chosen regression methods could produce distinct results. Moreover, samples at different quantiles may lead to considerably different levels of information asymmetry. The present research suggests that quantile regression models be employed to better reveal the situation of the insurance market and reduce estimation errors.

Examining the challenges of the Russian sharing economy: the institutional and evolutionary approach

This study examines the key features of Russian sharing economy business specialized in food delivery using the institutional and evolutionary approach. Existing business models used by Russian food delivery companies are characterized by a high level of information asymmetry in the employee-employer relationship. This has led to a great deal of tension and resulted in the open conflict between food delivery companies and couriers. This study is a qualitative research initiative based on a series of semi-structured in-depth interviews with the employees of delivery companies. The results obtained enabled us to distinguish between two groups of couriers. While most “part-time” couriers, who work no longer than 4 hours per shift, are satisfied with their labor conditions, there is a widespread opinion among “full-time” delivery workers that they are underpaid and overloaded. Popular institutionalized form of employment that Russian food delivery companies offer for couriers is self-employment. This form of employment has low social guarantees however minimize employers’ expenses on personnel and social contributions. Even though digital platforms position themselves as reliable partners providing employees with the opportunities for flexible working hours and decent pay, in reality couriers become a very vulnerable and precariatized social group without proper social guarantees and future prospects.

ФІНАНСОВА БЕЗПЕКА ВІДНОСИН ІНОЗЕМНОГО ІНВЕСТОРА З УПРАВЛІНСЬКОЮ КОМПАНІЄЮ В ПАРАДИГМІ «АСИМЕТРІЇ ІНФОРМАЦІЇ» ТА «МОРАЛЬНОГО РИЗИКУ»

The article is devoted to scientific analysis and characterization of the foreign investor's (the subsidiary owned by such investor) relations with the management company. The high level of information asymmetry and moral risk in relations between foreign investors and management companies was emphasized. The main advantages and disadvantages of transferring the functions of the executive body to the management company were highlighted (more effective management – on the one hand and higher risks of breaching non-compete or non-disclosure rules, higher expenses – on the other hand). The current state of legislative regulation of the status of the management company was analyzed. It was suggested to enshrine recommendations in legal acts regarding: financial indicators (the size and the form of payment of the share capital, the volume of net assets, indicators of financial stability and sustainability), qualification, skills, experience, and education of employees, premises, technical and software indicators, non-compete and non-disclosure rules, which the management company should meet. Institutional analysis of the agreement on transferring the functions of the executive body to the management company was carried out, main distinctions of this kind of agreement from the agency agreement, the mandate contract, the service agreement, and the property management contract were explained. It was proposed to determine the agreement on transferring the functions of the executive body to the management company as the business-law contract, according to which the legal entity-management company undertakes to provide managerial services for the company, to perform the functions of the executive body, stipulated by the corporate legislation and the charter of the company, is empowered to dispose the property and to make transactions on behalf and in the interests of the company, and shall receive payments for such services from the company. Practical recommendations regarding improvement of legal regulation of relations with the management company were given in order to increase the investment attractiveness of Ukraine.