Lower Information Asymmetry Research Articles

Web-based financial reporting, social media and information asymmetry: the case of Saudi Arabia

Purpose This paper aims to examine the effect of Web-based financial reporting and social media platforms on the proxies of information asymmetry in the Saudi Stock Exchange. Design/methodology/approach The sample of this paper consists of 133 Saudi listed non-financial companies for the year 2019. Web-based disclosure level was measured using 25 items, and the social media platforms examined in this study are Facebook, Twitter and LinkedIn. The information asymmetry proxies are measured using the relative spread and the time-weighted average bid-ask spread. Findings The empirical results have shown that there is a negative and significant relation between Web-based financial reporting and the adoption of social media platforms and the proxies of information asymmetry. Indeed, the relative spread and the time-weighted average bid-ask spread decreased with increased Web-based reporting levels. Among three platforms (Facebook, Twitter and LinkedIn), the results show that only the use of Twitter as a channel for information disclosure has a negative and significant effect on information asymmetry proxies. Consequently, in the Saudi context, the authors demonstrate that the assumptions of the agency, stewardship and signaling theories are supported. Also, results reveal that the effect of information disclosure through websites and social media on reducing information asymmetry is stronger for large companies than small companies. Practical implications The paper provides new insights into the role played by websites and social media platforms in the reduction of the information asymmetry in the stock market. Consequently, investors and regulatory authorities in the Saudi financial market must give great importance to online information disclosure and its implications for lowering information asymmetry. This empirical study informs regulators in Saudi Arabia to conduct the better practice of Web-based and social media financial reporting and to regulate the current practice of information disclosure. Besides, the obtained results have the potential to convince firms’ managers to improve online information disclosure to benefit from the reduction in information asymmetry. Originality/value Unlike previous studies, this study investigates, simultaneously, the effect of Web-based and social media information disclosure on the proxies of information asymmetry in a developing economy. In addition, the hypotheses of this study are developed based on a set of theories (the agency, signaling and stewardship theories), to verify the applicability of these three theories in the Saudi context.

Borrowing during periods of policy uncertainty: The role of foreign lenders

Despite the documented detrimental effect of policy uncertainty on borrowing costs, there is no evidence on the potential role of cross border borrowings during such periods. In this study, we test two hypotheses on the potential role of foreign lenders during periods of high policy uncertainty. The first is the common exposure hypothesis, which predicts that domestic lenders pass their uncertainty exposure on to borrowing firms by charging higher loan spreads. Hence, foreign lenders without such exposure could be able to help dispel policy uncertainty. The second is the information cost hypothesis, which predicts that foreign lenders compensate for information asymmetry when lending in host countries by charging high loan spreads, which suggests potential higher costs of foreign borrowing. We find that foreign lenders who are not simultaneously exposed to policy uncertainty charge lower loan spreads than domestic lenders, which supports the common exposure hypothesis. Additional analysis reveals that the two hypotheses complement each other, as the documented effect is particularly pronounced for foreign lenders who are exposed to lower information asymmetry. The findings of the study shed some light on the role of financial market integration during periods of high policy uncertainty.

The influence of target CSR performance on acquirer acquisition announcement returns

With this study, we examine the influence of a target’s CSR performance on acquirer announcement returns. We posit that when targeting a company with superior CSR status, acquirers face lower information asymmetries and less opportunistic behavior during the acquisition process as well as post-acquisition access to valuable resources, resulting in a more positive investor reaction and thus higher acquirer announcement returns. We furthermore argue for the acquirer’s own CSR performance being a contingency factor moderating the target CSR-acquirer performance relationship. We find empirical support for our hypotheses in a sample of 232 acquisitions announced between 2003 and 2013. Our work adds to research on acquisition performance, specifically how target characteristics influence acquisition outcomes.

CSR-enhancing Acquisitions: Investigating the Role of CSR in Corporate Strategy

In this paper, we explore and investigate whether and to what extent CSR-enhancing acquisitions, defined as acquisitions where targets have a better corporate social responsibility (CSR) record than the acquirers, create value for acquirers’ shareholders. Drawing on the social capital perspective on CSR and stakeholder theory, CSR-enhancing acquisitions can be seen as a strategy pursued by firms to accumulate social capital and improve their CSR performance. Using a sample of acquisitions involving publicly traded firms the period of 1991-2013, our study shows that the announcements of the CSR-enhancing acquisitions yield higher cumulative abnormal returns (CAR) for acquiring firms’ shareholders, compared to those of non CSR-enhancing acquisitions. On one hand, the positive effect of CSR-enhancing acquisition on the abnormal returns becomes more salient (i) during economic downturns and (ii) in the presence of low information asymmetry. On the other hand, because of expectancy violation and inconsistency, the effect of CSR-enhancing acquisitions on the announcement returns is attenuated when acquirers have a recent involvement in controversial issues.

Does the Threat of a PCAOB Inspection Mitigate US Institutional Investors' Home Bias?*

ABSTRACTWe exploit the staggered introduction of the PCAOB's international inspection program to examine the role that the stringency of public audit oversight plays in shaping US institutional investors' home bias. Analyzing a sample of foreign firms listed in the United States, we evaluate whether US institutional investors hold larger equity stakes in these firms—a longstanding issue that reflects investor portfolio decisions—if their auditors are exposed to the threat of a PCAOB inspection. In a differences‐in‐differences framework, we find that US‐listed foreign firms enjoy an increase in US institutional investors' equity positions after their auditors become subject to PCAOB inspection access. Cross‐sectional analysis implies that the benefit of the PCAOB inspection threat in mitigating US institutional investors' home bias is concentrated in foreign countries without a strict local audit oversight system; active US institutional investors that are known to value accounting transparency; and firms from countries that grant PCAOB access later (after the onset of its international inspection program in 2005). Our evidence suggests that foreign firms become better known in the capital markets under the PCAOB inspection program, which induces US institutional investors to acquire larger equity stakes in US‐listed foreign firms given the lower information asymmetry that ensues under the PCAOB inspection threat.

Secondary Market Transparency and Corporate Bond Issuing Costs

Abstract Mandated post-trade transparency in secondary markets lowers the cost of issuing corporate bonds. We show that costs are lower due to the mitigation of information asymmetry in the issuing process. Three pieces of evidence support this finding. First, new issues with higher information asymmetry experience relatively larger reductions in issuing costs. These bonds also experience lower reductions in trading activity than lower information asymmetry bonds, so liquidity cannot explain these results. Second, when a larger fraction of trades in comparable bonds are made post-trade transparent, new issue pricing improves. This holds when conditioning on expected bond liquidity. Third, transparency raises prices in the secondary market, but not by as much as it does for newly issued bonds.

Disciplining entrenched managers through corporate governance reform: Implications for risk‐taking behavior

AbstractResearch question/issue This paper examines how enhanced monitoring by corporate boards following the passage of the Sarbanes–Oxley Act of 2002 and concurrent reforms to stock exchange rules (SOX) mitigated risk‐related agency conflicts prevalent in entrenched firms.Research findings/insights Post‐SOX, entrenched firms increased risky and value‐enhancing investments. These investments were financed by reductions in financial slack and dividend payouts and by lower cost of debt. The specific mechanism driving the positive changes in corporate policies of entrenched firms is the SOX requirement of an independent compensation committee. Managers of entrenched firms previously noncompliant with this requirement are rewarded with more equity‐based pay after SOX, which strengthened their incentives to pursue value‐creating riskier investments. Only firms with low information asymmetry benefit from this requirement.Theoretical/academic implications The paper provides evidence of a disciplining effect of the critically important governance legislation on firms with entrenched management. The findings suggest that, by imposing an additional layer of discipline on managers, SOX increased managers' willingness to take on riskier but more value‐enhancing projects that were previously stifled in entrenched firms. The paper underscores the roles of an independent compensation committee and information cost in alleviating managerial risk avoidance.Practitioner/policy implications The paper has implications for the ongoing debate among policymakers and legislators on the costs and benefits of SOX and for future governance reforms. Legal enforcement of stricter board requirements can realign investment policies with shareholders' interests even in the presence of value‐reducing firm‐specific arrangements that entrench managers. However, majority independent board and fully independent audit and compensation committees do not rein in chief executive officer (CEO)'s risk aversion. It is a fully independent compensation committee that is instrumental in incentivizing CEOs to pursue risky projects that also add value. Firms and policymakers need to be aware that the effectiveness of the independent compensation committee in designing optimal pay policies depends on the access to timely and accurate information. Other mechanisms need to be considered to enhance risk‐taking in entrenched firms operating in high cost information environments.

Choice between Acquisition and Joint Venture Based on Financial Statement Comparability

This study examined the relationship between target firms’ financial statement comparability and bidder firms’ boundary decisions. The study used initial public offering (IPO) firms as target firms to test the impact of asymmetric information and signaling on investing bidder firms’ boundary decisions, such as joint ventures or acquisitions. In the IPO market, as an experimental setting, bidder firms are unfamiliar with issuing firms because they have little information about them prior to the IPO. This study argues that IPO firms with higher accounting comparability show lower information asymmetry. Consistent with this argument, we found that IPO firms’ accounting comparability has a positive probability of becoming a target for either a joint venture or acquisition, or an acquisition instead of a joint venture. This study contributes to the literature, financial statement comparability, and joint venture and acquisition decisions to measure the degree to which information asymmetry affects corporate investment strategy using a unique experimental setting of IPO firms.

Is there a dark side of managerial ability? Evidence from the use of derivatives and firm risk in China

In the absence of agency problems, firms with able managers are expected to use derivatives effectively for risk management purposes. But the agency theory suggests that self-interested managers may use derivatives to their advantage for rent-seeking activities. Using a sample of Chinese listed firms from 2008 to 2019, we find strong evidence consistent with this rent-seeking idea. In particular, we find that the relationship between the use of derivatives and firm risk is negative, but this negative relationship is less pronounced for firms with high-ability managers compared to firms with low-ability managers, suggesting that managerial ability has a positive moderating effect on this negative relationship. In addition, this positive moderating effect is more (less) pronounced in firms with weak (strong) monitoring, diffuse (concentrated) ownership, high (low) information asymmetry, and weak (strong) corporate governance. The findings are robust to alternative measures of key variables, an alternative empirical model, and endogeneity concerns. Consistent with the view that able managers’ rent-seeking activities (through taking risky derivatives position(s)) cannot enhance firm value or growth, further analyses reveal that both managerial ability and its interaction with the use of derivatives, have negative impacts on Tobin’s Q.

The impact of internationalization on IPO underpricing: A result of agency costs reduction, a certification effect, or a diversification benefit?

We examine the impact of internationalization on IPO underpricing in China. Our findings, which suggest that internationalization can reduce IPO underpricing, echo similar findings in the literature. However, we document that the transmission channel is not consistent with a diversification benefit documented in the literature. Instead, we find that internationalization: 1) serves as a good signal for investors and certifies the IPO is a quality investment due to lower information asymmetry; and 2) enhances corporate governance so that agency problems are less severe, thus leading to lower IPO underpricing. Overall, the underlying mechanisms differ between mature and emerging markets.

Controlling Shareholders’ Equity Pledges, CSR Information Disclosure, and the Accuracy of Analysts’ Earnings Forecasts

We identify and predict circumstances where equity pledging by controlling shareholders reduces the accuracy of analysts’ earnings forecasts in the Chinese market. First, we predict that controlling shareholders opportunistically manipulate firm disclosure to avoid or alleviate margin call costs of pledging, increasing non-diversifiable information risk and impairing the accuracy of analysts’ earnings forecasts. Consistent with predictions, analyst forecast errors are positively associated with the proportion of shares pledged and this association strengthens with the severity of margin call pressure. Results demonstrate that the consequences of share pledging are widespread, with increases in analyst forecast error continuing to occur even in low information asymmetry contexts such as large firms and stable earnings. Second, CSR disclosures and the quality of CSR reporting moderates the relation between analysts’ forecast errors and share pledging by controlling shareholders. The adverse effects of share pledging significantly decline when firms disclose CSR reports with improvements in analyst forecast accuracy in excess of 50 percent on average. Further, equity pledging by controlling shareholders represents a financing transaction and we find that capital stakeholder disclosures in the CSR report are generally most useful in improving analyst forecast accuracy.

The “15 Days” Debate: The Value of an Early Release of Information (Evidence from 10-K Submissions)

We analyze the long-term effects of accelerating the 10-K deadline by 15 days. Using a regression discontinuity design, we find that accelerated firms are more likely to issue a restatement when their 10-K deadline is binding. 10-Ks submitted by accelerated firms have a larger market reaction. Accelerated firms have lower information asymmetry, which is consistent with our finding that EDGAR filing search traffic is lower for the accelerated filers.

From watchdog to watchman: Do independent directors monitor a CEO of their own age?

We examine the impact of age similarity between independent directors and the CEO on earnings management. Using changes in independent director composition due to same-aged director deaths and retirements for identification, we find that firms with the presence of independent directors who have the same age with the CEO are more likely to manage earnings. We further find that age similarity between these two parties increases earnings management through lowering the effectiveness of board monitoring. Additionally, this positive impact decreases as the age gap widens, but intensifies if independent directors share other characteristics with the CEO, if independent directors sit on audit or nomination committees, if firms with lower information asymmetry and if CEOs are older. Our results are robust to alternative proxies of earnings management. • We find that firms with the presence of independent directors who have the same age with the CEO are more likely to manage earnings. • We further find that age similarity between these two parties increases earnings management through lowering the effectiveness of board monitoring. • Using changes in independent director composition due to same-aged director deaths and retirements for identification, we find that our baseline results still hold. • Additionally, this positive impact decreases as the age gap widens.

The negative corporate governance impact of distracted shareholders: evidence from value of cash holdings

ABSTRACT This paper examines whether distracted shareholders reduce firms’ value of cash holdings. Following prior literature, we construct a firm-year level shareholder ‘distraction’ measure, by exploiting exogenous shocks to institutional shareholders’ portfolios. We find that firms with distracted shareholders experience a decrease in the marginal value of cash holdings, which indicates that firms with distracted shareholders are more likely to misallocate company resources due to lack of monitoring. We further find that this effect is more pronounced for firms with low information asymmetry, few product market competitive threats, and high analyst coverage. The results of this paper suggest that institutional investor attention distraction will reduce firms’ monitoring intensity, which exacerbates firms’ opportunistic behaviors.

The Impact of Accounting Standard Adoption Complexity on Financial Reporting Quality and Market Outcomes: Evidence from ASC 606

This study examines the impact of accounting standard adoption complexity on financial reporting quality and market outcomes. We capture adoption complexity by uniquely using adoption-related disclosures required under Staff Accounting Bulletin (SAB) 74. We examine the adoption outcomes of the new revenue recognition standard under Accounting Standards Codification (ASC) 606. This standard is one of the most significant changes to accounting standards in recent times. Among materially impacted companies, we find that those with greater adoption complexity experience lower revenue-related financial reporting quality and lower information asymmetry in the post-adoption period. Importantly, we find that reductions in information asymmetry only occur for companies with complex adoptions and higher adoption quality, suggesting that the market discerns between high- and low-quality adopters. Overall, our results suggest that while the adoption of ASC 606 is challenging, it is associated with market benefits. Notably, they underscore the importance for future research and market participants that evaluate adoption outcomes to consider adoption complexity and adoption quality. Otherwise, they could miss an important facet of the adoption and may attribute adoption outcomes less precisely.

Accounting for R&D on the Income Statement? Evidence on Non-Discretionary vs. Discretionary R&D Capitalization Under IFRS in Germany

This paper compares the informativeness of discretionary research and development (R&D) capitalization under IAS 38 with non-discretionary “as-if” R&D capitalization. While prior research has consistently demonstrated capital market benefits of “as-if” capitalization, prior evidence for reported R&D capitalization has been less favorable due to earnings management concerns. Since “as-if” studies are based on adjusted data assuming R&D capitalization, the resulting numbers are free from such concerns and may hence be more informative. We find that reported capitalized R&D is not associated with lower information asymmetry but positively associated with forecast errors. Consistently, while market values are not associated with reported capitalized R&D, they are strongly associated with “as-if” capitalized R&D. Also, actual capitalization of development expenditures under IAS 38 is only as value relevant as expensing all R&D. Our results are consistent with the notion that market participants undo actual capitalization and use the information on expensed R&D to develop their own estimates of R&D value. Our findings lend support to the proposition by Barker and Penman (2020) that deficiencies of the balance sheet that result from the uncertainty inherent in expenditures such as R&D, should be supplemented by more detailed information on the nature of the related expenses in the income statement.

Ownership structure and intellectual capital: empirical evidence for Jordanian listed firms

The main objective of the current study is to examine the impact of ownership structure on intellectual capital (IC) disclosures from a stakeholder theory perspective. The current study employs a disclosure index approach to examine the extent of structural and relational capital disclosures of Jordanian listed firms with data from 2012 to 2018. Ordinary least squares regression models for structural capital, relational capital, and overall IC disclosures are employed. The findings show a negative significant impact of management ownership on relational capital disclosures, a positive impact of foreign ownership on relational and overall IC disclosures, and a positive impact of institutional ownership on all three IC models. Hence, our study suggests that managers are not inclined to provide relational capital disclosures for the benefit of stakeholders. Moreover, it suggests that foreign investors require lower information asymmetry, which leads to measures being taken to enhance IC practices. We believe that our study adds knowledge to the current IC literature since it provides empirical evidence concerning knowledge-based IC disclosures in emerging markets such as Jordan.

The Impact of Internationalization on IPO Underpricing: a Result of Agency Costs Reduction, a Certification Effect, or a Diversification Benefit?

We examine the impact of internationalization on IPO underpricing in China. Our findings, which suggest that internationalization can reduce IPO underpricing, echoes similar findings in the literature. However, we document that the transmission channel is not consistent with a diversification benefit documented in the literature. Instead, we find that internationalization: 1) serves as a good signal for investors and certifies the IPO is a quality investment due to lower information asymmetry; and 2) enhances corporate governance so that agency problems are less severe, thus leading to lower IPO underpricing. Overall, the underlying mechanisms differ between mature and emerging markets.

Cultural Proximity and the Formation of Lending Relationships

We assemble a unique dataset containing population-level information on loans in a region hosting two cultural groups to study the role of culture in the formation of credit relationships. We find that cultural proximity is a first-order determinant of the choice of banking relationships when firms apply for loans. This effect is stronger for opaque firms, but not for riskier or less performing firms. Conditional on a loan application, banks are not more likely to approve loans of same-culture firms. Selection into same-group relationships may lead to lower information asymmetries in the screening process, ultimately leading to better loan performance.

Is the cost of equity a mere function of leverage? The case of bond IPOs

AbstractIn this paper, we investigate how undertaking a bond IPO influences a firm's cost of equity. Using a sample of nearly 600 firms that have gone through a bond IPO over the 1980–2014 period, we show that the change in the cost of equity that results is not just a function of leverage influencing the risk of residual owners. The information and monitoring environment, and agency relationships of a firm change significantly with its first public debt, and these changes can have a significant impact on the firm's cost of equity. We find that firms that have relatively high information asymmetry before they undertake the bond IPO experience less of a rise in their cost of equity than firms with relatively low information asymmetry consistent with these firms benefitting from improvements in their information environment as a result of the IPO. We also show that firms with high pre‐bond IPO free cash flow see less of an increase in their cost of equity than firms with low pre‐bond IPO free cash flow consistent with the disciplining mechanism of additional debt and the benefit from additional monitoring. In addition, we find that firms with poor corporate governance experience less of an increase in their cost of equity after the bond IPO than firms with better corporate governance. The evidence suggests that the change in the riskiness of equity after a firm goes through a bond IPO is much more complex than what is predicted by the leverage increase.