Lower Information Asymmetry Research Articles

Empirical Discourse on Accounting Conservatism and Financial Performance of Multinational Companies in Nigeria

This study aims at finding out how accounting conservatism influences the financial performance of multinational companies (MNCs) in Nigeria. In particular, it investigates the impact of unconditional and conditional conservatism on the return on equity (ROE) of MNCs in Nigeria. It also considers how financial leverage and size of the firm moderate this relationship. The study takes a positive research approach and collects data from eight cross-sectional entities represented by 120 observations over 15 years (2006 – 2022). During the investigation, information was sought from the sample of eight MNCs that were used. The panel-corrected standard error regression (PCSE) was employed to deal with potential parameterization problems. In conjunction with the regression analysis, several diagnostic tests were conducted including multicollinearity testing, correlation analysis, and descriptive statistics. The statistical software Gretl was used to evaluate the regression results. The results indicate that conditional conservatism enhances the financial performance in terms of the ROE of the sampled MNCs which is significantly higher. On the other hand, unrestricted conservatism has an adverse effect on ROE reducing it. While higher levels of conditional conservatism positively affect the financial performance of MNCs, larger degrees of unconditional conservatism lower their return on equity (ROE). Given these findings, suggestions are given to the management that multinational company managers should opt for conditional conservatism so as to lower information asymmetry in financial reporting since it enhances financial performance as well as operational effectiveness.

The risk screening effect of digital insurance distribution

AbstractExtant research holds that digital sales channels advance competition and service or goods availability but rarely details the attendant information asymmetry. Leveraging a large unique dataset, this study examines a specific case in which consumers have a choice between offline and digital channels for insurance purchases. We find that digital channels screen in consumers with lower unobserved risk. For term life, endowment and disease insurance products, the average risks of the policies purchased through digital channels were significantly lower than those purchased offline after controlling for all observed risk characteristics. This risk screening effect mainly comes from the inclusion of new low‐risk enrollees. As a consequence, digital channels exhibit lower information asymmetry and greater profitability compared to offline channels.

Carbon disclosures and information asymmetry: Empirical evidence on the importance of text in understanding numerical emission allowance disclosures

AbstractCarbon disclosures are essential for investors to evaluate firms’ efforts to combat climate change. In this study, we focus on a specific type of carbon disclosures—namely, emission allowance disclosures—that capture how firms implement emission reductions under the European Union emission trading system (EU ETS). Given the continuously changing institutional features of the EU ETS and the lack of authoritative guidance on how firms should account for emission allowances in their financial statements, it is exceedingly difficult for investors to understand numerical emission allowance disclosures and to compare them across—and even within—firms. Motivated by this criticism, we hypothesize and find that textual disclosures complementing numerical emission allowance disclosures are associated with lower information asymmetries between firms and their investors. Further analyses show that textual disclosures that: (i) describe the accounting approach, and (ii) contain institutional information on the EU ETS, respectively, are particularly important for improving the information environment of numerical emission allowance disclosures. Overall, our findings suggest that text can improve the understanding of numbers in a carbon disclosure context. Therefore, our study not only contributes to the (industrial ecology) literature but also has important implications for regulators, policymakers, investors, financial analysts, and firms.

Manipulating stock prices based on insider information

Purpose This paper aims to investigate the trading behavior of insider investors before and after information releases, identifying information-based manipulation in the stock market and the characteristics of companies whose stock prices are manipulated. Design/methodology/approach This paper employs logit regression method and an event study approach, utilizing hand-collected data from 2010 to 2022, with information categorized into negative and positive types. Findings The results show no evidence of insider trading or negative information-based manipulation in both high and low transparency firms. However, in highly transparent companies, the Board of Directors (BOD) avoids direct manipulation by using relatives to evade market supervisors. In low transparency companies, both the BOD and family members (FM) exploit positive information to benefit personally by buying shares before releasing favorable news, causing a sharp stock increase, and selling afterward. Continued buying by the BOD and FM also suggests likely positive news announcements. Practical implications The characteristics of information-based manipulation in companies, as provided by this study, help individual investors avoid investing in stocks that are highly susceptible to manipulation. Originality/value Empirical research on information-based manipulation is scarce due to limited secondary data. Our study uses transaction data from insider investors in a frontier market with low transparency and high information asymmetry. This enables us to analyze information-based stock price manipulation. We identify manipulation by comparing insiders' trading behavior with their market information releases, resulting in stock price fluctuations greater than 5%.

Capital Market Consequences of Information about Individual Auditors

Synopsis The research problem This study examines the capital market consequences of the voluntary disclosure of individual auditor information. Specifically, we examined whether and how the disclosure of auditor qualification certificates is associated with information asymmetry and investors’ responses to earnings. Motivation Regulators have recently started to focus on disclosing auditor information beyond their names such as in China, where it is increasingly important in practice. Although prior studies have demonstrated benefits associated with the mandatory disclosure of partners’ names, there is relatively little evidence of the usefulness of additional information about individual auditors that could be provided voluntarily. This study sheds light on the economic consequences of disclosing detailed information about individual auditors and extends the voluntary disclosure literature. The test hypotheses We tested the following hypotheses in this study: (a) voluntary disclosure of auditor qualification certificates is associated with lower information asymmetry and (b) voluntary disclosure of auditor qualification certificates is not associated with investors’ reactions to corporate earnings announcements. Target population Stakeholders of listed companies and audit firms, including company managers, investors, and accounting regulators. Adopted methodology Ordinary least squares regressions, archival data, interviews, and machine learning methods to obtain initial data. Analyses We first crawled the annual audit reports of listed companies in China and used machine learning methods to capture voluntary disclosure of auditor qualification certificates. In a sample of more than 14,000 Chinese company-years from 2012 to 2018, we identified 10.5% of the observations voluntarily disclosing auditor qualification certificates. We used the bid-ask spread as the proxy of information asymmetry, and the earnings response coefficient refers to the coefficient on unexpected earnings to the cumulative abnormal returns. Findings We found that the voluntary disclosure of auditor qualification certificates is associated with lower information asymmetry and stronger market reaction to earnings announcements. The main results hold through various robustness tests. Cross-sectional analyses show that this association is less pronounced when a company employs a larger audit firm or has higher analyst coverage. Further, the specific information conveyed by the auditor qualification certificate, such as the auditor’s facial trustworthiness, helps explain the economic consequences associated with voluntary auditor qualification certificate disclosure. Moreover, an initial disclosure of auditor qualification certificates is associated with greater effects.

The audit committee’s IT expertise and its impact on the disclosure of cybersecurity risk

This paper examines the impact of the audit committee's IT expertise on corporate cybersecurity risk disclosure against the backdrop of increasing complexity and frequency of cyberattacks. We find that IT expertise of audit committees significantly improves the disclosure of cybersecurity risks. This effect is more pronounced in firms with less transparent financial reporting, firms with weaker governance, and firms with lower information asymmetry. Furthermore, the level of artificial intelligence adoption, the quality of internal controls, and the quality of information disclosure are potential influencing channels.

Is online interactive media monitoring effective? Evidence from corporate tunneling in China

We examined the impact of the volume of Q&As from minority shareholders on interactive questions and answers (IQA) platforms in restraining tunneling. The findings suggest that Q&A volumes contribute to less tunneling. We find that by lowering information asymmetry and enhancing firms' internal control effectiveness, IQA platforms play a monitoring function, effectively restraining tunneling. The moderating analysis reveals that the impact of IQA platforms on restraining tunneling is more salient when a firm has (1) only small shareholdings from other large blockholders, (2) low-quality auditors, (3) low institutional investor shareholdings, (4) a large wedge of ownership and control, or (5) controlling shareholders who pledge their shares to financial institutions. Additional analysis suggests that the effectiveness of IQA platforms improves with more timely, thorough, readable, and related replies. Our results support the public policy of providing online platforms for minority shareholders to exercise their rights.

Signaling innovation: The nontax benefits of claiming R&D tax credits

Using the IPO setting, we test whether firms signal the quality of their investments in innovation activities by claiming R&D tax credits. We find the presence and amount of the R&D credit are each associated with lower information asymmetry and with higher investor demand at IPO. Conservatively, we estimate that sample firms realize additional IPO proceeds of 32–45 percent of their creditable R&D expenditures, indicating economically significant non-tax benefits associated with the R&D credit. We verify the R&D credit signal by showing its positive association with firms’ future patenting activity, patent citations, and post-IPO stock returns. Results from these tests are concentrated among firms limited in their ability to obtain tax benefits from R&D credits, consistent with the R&D credit providing nontax benefits as a signal of innovation investment quality.

Impact of Fintech on labor allocation efficiency in firms: Empirical evidence from China

Fintech has significantly influenced the traditional financial industry by introducing advanced technologies and innovative business models that have resulted in profound impacts. This study examines the effects of Fintech development on labor allocation efficiency and explores its underlying mechanisms. Using a set of Chinese A-share public firms from 2011 to 2020, we find that Fintech development plays a positive role in labor allocation efficiency, mainly by mitigating labor overinvestment. This positive effect is further reinforced by market competition. We also find that the primary pathways of this enhancement include lowering information asymmetry, mitigating agency issues, and substituting low-skilled labor. Moreover, we show that the dimensions of depth and digital integration are particularly important in improving labor allocation efficiency.

Navigating greenwashing in the G8: Insights into family-owned firms, technology innovation, and economic policy uncertainty

Our study provides practical insights into the impact of greenwashing on Corporate Financial Performance (CFP) and investment efficiency. We delve into the moderating influences of family-owned firms, technological innovation, and economic policy uncertainty in the nexus between greenwashing and CFP. Using a Method of Moments Quantile Regression (MMQR) model and conducting robustness tests, our results suggest that in G8 nations, family-oriented stakeholders struggle to discern greenwashing due to low information asymmetry. However, technological innovation and reduced economic policy uncertainty enhance the identification of greenwashing. Greenwashing enhances firm value by improving disclosure quality, addressing stakeholder concerns, and easing financing constraints. Notably, heavily polluting and mandatory disclosure firms experience more significant economic performance from greenwashing. This study provides practical implications for firms, policymakers, and stakeholders, fostering sustainable development in G8 nations.

Does Integrated Report Quality Matter for Supplier Financing?

ABSTRACT This study examines the relationship between integrated report quality (IRQ) and supplier financing using 603 firm-year observations from firms listed on the Johannesburg Stock Exchange (JSE) between 2011 and 2021. We find that IRQ has a positive association with supplier financing, indicating that firms with higher IRQ are more likely to attract increased supplier finance. This positive IRQ-supplier financing relationship is further intensified by lower information asymmetry, implying that firms’ information environment plays a pivotal role. Mediation analysis indicates that information asymmetry and creditworthiness serve as underlying channels through which IRQ affects supplier financing. The IRQ-supplier financing interaction is also found to increase firms’ value. The study’s findings are crucial for stakeholders, such as report preparers, regulators, policymakers, the IIRC, IASB, ISSB, and JSE. These findings highlight IRQ’s importance in enhancing supplier finance and indicate further steps to enhance IRQ for fostering financial stability and sustainable development worldwide. Data Availability: All data are publicly available from the sources mentioned in the paper. JEL Classifications: G32; M41; M42.

On investment strategy of the company adjusted to the state monetary policy

The author examines the impact of the policy of the Bank of Russia, information asymmetry and business profitability on the investment agenda of Russian public companies. The tight monetary policy of the state is a restraining factor in the economy and is caused by a reduction in corporate investment. Faced with increased funding and external sanctions, Russian companies are forced to focus on internal sources of investment financing. Using the analysis of panel data, the author substantiates that companies act in line with a precautionary motive, saving some money for subsequent financing of capital investments. Low information asymmetry makes debt financing a less expensive procedure. The tangibility of assets is an indicator or hallmark when a company evaluates the cost of raising capital. The author chose a regression model with fixed effects to prove the impact of the increase in the cost of funding on the investment opportunities of the company. The unobservable individual effect may include various indicators, in particular, the quality of corporate governance, fluctuations in financial markets. Share price growth is directly related to the return on assets. An increase in the key interest rate worsens the company’s investment prospects. To save money the company can turn to debt financing in conditions of low information asymmetry. Tangible assets can serve as collateral, and debt is a fairly inexpensive financing option, even under financial constraints. To expand investment demand in the context of the main objectives of the National Security Strategy of the Russian Federation it is necessary to link the key interest rate of the Bank of Russia to profitability in key sectors of the economy.

Common Ownership and Goodwill Impairments

ABSTRACTResearch Question/IssueAre companies monitored by common owners (i.e., institutional investors that block‐own [owning 5% or more] several companies in a single industry) more likely than other companies to record goodwill impairments when their assets are overstated?Research Findings/InsightsWe find that companies monitored by common owners are more likely than other companies to record goodwill impairments when their assets are overstated. The monitoring effect is stronger for common owners with a stronger incentive to monitor and with more industry knowledge and stronger for the co‐presence of multiple common owners. Our findings are in line with the notion that common owners have an economy of scale in monitoring and internalize the negative externality of delayed recording of goodwill impairment. We also find that common ownership is associated with lower information asymmetry, which in turn increases the timeliness of goodwill impairment.Theoretical/Academic ImplicationsOur research emphasizes the monitoring role of common ownership in recording goodwill impairments. We find support for the mechanisms enabling common owners to be better monitors.Practitioner/Policy ImplicationsThe prevalence of common ownership has prompted regulatory and societal concerns regarding under‐investment in the oversight of the companies. Our findings documenting the association between common ownership and the timely recording of goodwill impairments are relevant to the ongoing debate regarding the potential costs and benefits of common ownership.

Digital Natives and Signalling in Employment Interviews: An Inquiry into the Acceptance and Perceived Fairness of Different Interview Modes

The paper investigates the signalling behaviour of digital native applicants in employment interviews and analyses how their reactions differ in face-to-face versus video-mediated contexts. The social presence within the interview setting and the possibility of employing impression management tactics are of particular interest to understanding the subjective acceptance and perceived fairness of the two types of selection procedures. The analyses of novel primary data from a German survey with 513 valid responses reveal that digital natives, similar to older applicants, appreciate signalling to lower information asymmetries. Regardless of interview mode, social presence and impression management are strong positive drivers of acceptance and perceived fairness. While members of the generational cohort still accept face-to-face interviews more than those mediated by videoconferencing technology, they perceive the former as less fair. This result, which may be explained by the specific characteristics of digital natives, contradicts the findings of studies that have investigated preceding generations. Hence, the paper complements the literature on applicant reactions by focusing on two younger generational cohorts, namely Generation Y and Z. Furthermore, the adoption of the signalling framework in this context suggests that the beneficial effects of signalling may stand vis-à-vis feelings of unfairness, which can be interpreted as additional psychological costs that are driven by moral considerations.

Price limit relaxation and stock price crash risk: Evidence from China

This paper investigates the impact of price limit relaxation on stock price crash risk, based on the change in the daily price limit in the ChiNext market in August 2020. We find that the widening of price limits significantly reduces stock price crash risk. This result is robust to parallel trend and placebo tests. Furthermore, we show that widening price limits can help lower information asymmetry between informed and uninformed traders, thereby decreasing bad news hoarding and reducing stock price crash risk.

Financial Analyst Coverage and Corporate Environmental Disclosure

AbstractConsistent with the monitoring function played by financial analysts, we find that greater analyst coverage leads to the same extent of improvement in the quantity and quality of environmental information disclosed by the firm. This result is remarkably robust after conducting a difference‐in‐differences analysis that exploits brokerage closures and mergers as an exogenous decrease in analyst coverage, as well as using an instrumental variable approach. The positive influence of analyst coverage on corporate environmental disclosure is particularly evident for firms that cause high environmental damage, firms with low information asymmetry and those followed by analysts with superior experience, accuracy and reputation. Taken together, our empirical findings provide new insights into the bright side effect of analyst coverage on corporate environmental‐related activities.

Foreign institutional ownership and Cross-Listing

Although foreign institutional ownership (FIO) is generally considered an important outcome of international cross-listings, most studies ignore the iterative nature of FIO—that is, FIO can also serve as a key determinant of cross-listings. Using a comprehensive dataset of international cross-listings of firms from 58 countries between 2001 and 2021, we examine the effect of FIO on firms’ cross-listing decision. Our results show that firms with a higher level of FIO before their cross-listing decision tend to have a significantly higher propensity to cross-list on foreign stock exchanges than firms with a lower level of FIO. Further analyses show that the positive association between FIO and cross-listings is weaker for firms with a better information environment, as evidenced by high analyst following, high media coverage, having a Big 4 auditor, and issuing management earnings forecasts. Additional evidence shows that FIO from countries with more developed institutions has a stronger effect on firms’ decision to cross-list. Taken together, our results are consistent with the argument that the presence of foreign institutional investors in firms signals their low information asymmetry and/or good corporate governance, thereby facilitating these firms’ international cross-listing decision.

Supply chain risk disclosure and seasoned equity offering discount

We examine the impact of forward-looking supply chain risk disclosure (FSCRD) on information asymmetry and seasoned equity offering (SEO) discounts. Using textual analysis of the future risk subsections of outlook sections in annual reports from a sample of Chinese SEOs, we find robust evidence that a high FSCRD lowers the information asymmetry of the SEO firm, leading to a lower SEO discount. Our additional analysis shows that when an SEO firm (1) has a high financial constraint, (2) has a significant institutional investor shareholding, or (3) has a large analyst following, the impact of FSCRD on the SEO discount is more pronounced, corroborating the findings that FSCRD lowers information asymmetry and the SEO discount. Additional analysis suggests that the effect of FSCRD on information asymmetry and the SEO discount can be attributed to investors' lack of supply chain risk information and investors' lack of ability to process such information. Our findings imply that managers should consider disclosing potential supply chain risks in their firms' annual reports to leave less money on the table in SEOs.

The power from folk monitoring: Leading Officials’ Natural Resources Accountability Audit (NRAA) and corporate ESG performance

This paper investigates the impact of China's Leading Officials' Natural Resources Accountability Audit (NRAA) on corporate Environmental, Social, and Governance (ESG) performance, using its implementation as a quasi-natural experiment. Findings highlight the NRAA's positive effect on ESG performance, primarily driven by increased folk environmental monitoring (FEM). The impact is more evident in firms with higher institutional shareholdings, lower information asymmetry, and within regions with strong legal frameworks. These results align with the NRAA policy's objective of promoting sustainable development and addressing ecological concerns through its positive role in corporate ESG performance.

Executive compensation controls and corporate cash holdings.

As a crucial component of internal corporate governance, remuneration controls possess the potential to influence the cash holdings of firms. However, identifying the causal relationship between these controls and such holdings presents a considerable challenge. To address this research gap, this paper leverages the implementation of China's Guidance on Further Regulating the Remuneration Management of Heads of Central Enterprises as a quasi-natural experiment to investigate the relationship between executive remuneration controls and firms' cash holdings, utilizing a double-difference approach. Based on an analysis of a sample of listed companies from 2007-2012, the results indicate that firms subject to regulated executive compensation exhibit lower cash holdings. To ensure the robustness of these findings, various statistical techniques such as parallel trend tests, variable replacement, propensity score matching, and placebo tests were employed. Additionally, a mechanism test was conducted, whereby the mediating effect of executive compensation controls on firms' cash holdings was examined, revealing a reduction in internal agency costs. Finally, the analysis of heterogeneity demonstrated that the impact of executive compensation controls on firms' cash holdings was more pronounced in companies with high-quality internal controls, stronger management oversight, and lower information asymmetry.