Mitigate Information Asymmetry Research Articles

Mobile phones, institutional quality and entrepreneurship in Sub-Saharan Africa

This study investigates whether mobile phone penetration modulates the effect of different indicators of governance on some indicators of the ease of doing business in Sub-Saharan Africa with data from the period 2000–2012 by employing the Generalised Method of Moments. Three broad concepts of governance are explored: (i) political (comprising voice & accountability and political stability/no violence), (ii) economic (involving government effectiveness and regulation quality) and (iii) institutional (including corruption-control and rule of law). Ten dimensions of entrepreneurship are considered. Two main findings are established with respect to the net effects of the interaction between mobile phones and governance dynamics. They are (1) reduced cost of business start-up procedure, the time to build a warehouse and the time to resolve an insolvency and (2) increased time to enforce a contract, to register a property and to prepare and pay taxes. Implications for theory and policy are discussed. Some of the engaged policy implications include the following. (i) Measures on how to leverage on the potential of mobile phone penetration for entrepreneurship opportunities by addressing challenge of access to and affordability of mobile phones on the one hand and on the other hand, improving on the role of the mobile phone as a participative interface between emerging entrepreneurs and governance. (ii) The relevance of the mobile phone in mitigating information asymmetry between entrepreneurs and government institutions, notably by: reducing government inefficiency (which potentially represents an additional cost to doing business) and decreasing informational rents, bureaucracy and transaction costs.

Earnings Transparency and Investments Efficiency

본 연구는 2002년부터 2014년까지 유가증권 시장에 상장된 6,827개 기업을 대상으로 이익투명성과 투자효율성 간의 관계를 실증 분석하였다. 선행연구는 회계정보의 품질이 높을수록 자본조달비용이 감소하며, 경영자의 기회주의적인 행위를 억제하는 매커니즘으로 작동하여 투자효율성을 높이는 것으로 보고한다. 따라서 이익투명성이 높을수록 정보비대칭 문제는 감소하고, 이로 인해 경영자를 통제하는 비용이 낮아져 투자효율성이 향상될 것으로 예측하였다. 이익투명성은 Barth etal.(2013)과 Cheng and Subramanyam(2008)에서 제시한 방법으로 측정하였고, 투자효율성은 Chenet al.(2011)의 방법으로 측정하였다. 분석결과는 다음과 같다. 첫째, 이익투명성이 투자효율성에 미치는 영향은 양(+)의 방향으로 유의하였다. 이는 회계정보를 제공하는 기업의 이익정보가 투명할수록 기업의 투자효율성이 좋아진다는 것을 의미한다. 둘째, 표본을 과대투자와 과소투자로 나누어 각각 분석한 결과 , 과소투자의 표본에서만 이익투명성과 투자효율성 간의 관계는 통계적으로 유의한 양(+)의 방향성을 나타냈다. 이는 과소투자의 경우에만 이익투명성이 높을수록 기업 투자행위는 효율적으로 진행된다고 할 수 있다.This study empirically analyzes the effect of earnings transparency on investments efficiency in Korea, using a sample of 6,827 firm-years from 2002 to 2014. Earnings transparency is measured using Barth et al. (2013) and Cheng and Subramanyam (2008) and is defined as how well it explains a firm value. Transparent firms may provide high quality information and better describe the economic value of a firm (Bushman and Smith 2003; Park et al. 2014). Investments efficiency can be regarded as an effective investment activity by reducing or increasing the amount of future investments in a situation where firms are likely to over- or under-invest. Prior research documents that financial accounting quality can improve investments efficiency by mitigating information asymmetry between investors and managers (Biddle and Hilary 2006; McNichols and Stubben 2008; Biddle at al. 2009). Investors in firms with high earnings transparency could monitor managerial decisions more effectively because their financial statements are comparable across the peers in the same industry and year (Bushman and Smith 2001; Biddle et al. 2009). Thus, we expect that managers opportunistic behaviors such as over- or under-investments may decrease in firms with high transparent earnings. investments efficiency is measured by using Chen et al. (2011). The results of this study show that earnings transparency is positively and significantly associated with investments efficiency. In addition, when investments is divided into over- and under-investments, the result is only consistent with the case of under-investments, implying that higher earnings transparency reduces only under-investments. We expand the prior literature on earnings transparency. This study provides insight for future research in areas such as capital market and corporate governance by showing the relation between earnings transparency and corporate investments decisions.

Liability and Reputation in Credence Goods Markets

This paper studies the impact of liability on a credence-good seller's incentives to maintain a good reputation. Credence goods markets are characterized with information asymmetry about the value of sellers' services to consumers who must rely on sellers for diagnosis and treatment provision. Liability refers to the legal environment in which the seller is liable for fixing consumers' problems after charging them the price for his treatment. When the seller is short-lived, liability mitigates information asymmetry and facilitates trade. Nevertheless, liability may undermine a long-lived seller's incentive to maintain a good reputation and reduces market efficiency.

Corporate governance strength and stock market liquidity in Malaysia

PurposeThe purpose of this paper is to examine the impact of corporate governance strength on stock market liquidity in an emerging country, namely, Malaysia, by constructing a corporate governance score that captures both internal monitoring mechanisms (board of directors’ characteristics, audit committee’s characteristics and internal audit function) and external monitoring mechanism (audit quality).Design/methodology/approachThe study uses a sample of 2,020 yearly firm observations in Bursa Malaysia over the period 2009-2012. The ordinary least square regression and several estimation methods such as two-stage least squares using instrumental variables (IV-2SLS) and dynamic GMM are employed.FindingsThis study finds a significant positive association between corporate governance effectiveness and stock market liquidity. The finding is robust to alternative liquidity measurements, to alternative estimation methods, and to endogeneity bias.Research limitations/implicationsThis result implies that the firms with effective monitoring mechanisms mitigate information asymmetry which leads to less adverse selection problems among traders.Practical implicationsThis study provides implications for regulators to help design regulations that enhance stock market liquidity. This study could also help investors and traders to formulate their trading decisions, and enables firms to know the importance of strengthening the corporate governance monitoring mechanisms.Originality/valueThis study constructs a corporate governance effectiveness measure by combining both internal and external monitoring mechanisms. These mechanisms have not been constructed together in one score in the corporate governance literature and the impact of internal audit function, as an internal monitoring mechanism on liquidity, has yet to be examined.

Managerial ability and bank‐loan pricing

AbstractThis paper examines the impact of borrowers’ managerial ability on lenders’ bank‐loan pricing and the channels through which managerial ability affects bank‐loan pricing. Using a large sample of US bank loans, we provide evidence that higher managerial ability is associated with lower bank‐loan prices. This effect is stronger in firms with high information risk, suggesting that an important channel for managerial ability to affect bank‐loan pricing is through improved financial disclosure to mitigate information asymmetry. The relationship is also stronger for firms with weak business fundamentals, implying that another channel is through improved business performance. Of these two mechanisms, path analysis suggests that the business‐fundamentals mechanism is the more important channel through which managerial ability affects bank‐loan pricing.

Product quality asymmetry and food safety: Investigating the “one farm household, two production systems” of fruit and vegetable farmers in China

The Chinese government faces a great challenge to safeguard the safety of the food supply chain due to the significant fragmentation of producers and weak institutional resources to monitor and enforce safety standards. Food safety in China has received escalating attention since the 2008 milk scandal. Mainly due to safety concerns, Chinese farmers adopt two separate production systems for the market and self-consumption, and thus, the so-called “One Farm Household, Two Production Systems” (OFH-TPS) has gained popularity in the recent years.This study provides a theoretical framework to examine how product inspections and certifications affect the OFH-TPS adoption by mitigating information asymmetry of product quality. It also shows that both food safety concerns and cost savings are important factors for famers' decision on the adoption. The empirical analysis finds that product inspections conducted by firms, agricultural cooperatives, and farmers curb the OFH-TPS adoption, whereas government inspections have no statistically significant effect. Farmers who grow “Green Food” are less likely but organic farmers are more likely to adopt the OFH-TPS. We also find that pesticide use training curbs the OFH-TPS adoption, and the perceived adverse effects of pesticide use to the environment and human health have no statistical effect. Farmers who use highly toxic or banned pesticides and/or who perceive food safety at the local markets is poor are more likely to adopt the OFH-TPS. This study provides rich policy implications. To safeguard food safety, it is critical to engage the private sector for co-regulation, improve the efficacy of government inspections, and promote education on pesticide use to both farmers as well as retailers of pesticides.

Management Sales Forecasts and Incremental Accruals

We investigate the importance of sales forecasts, voluntarily disclosed by management, on the understanding of the accrual component of earnings. The challenging global economic environment, with unanticipated changes, emphasizes the importance of accrual- based reporting on investment decisions. On that ground we develop an incremental accrual measure, derived by management sales forecasts, and relate it with management earnings forecast errors intending to capture additional information valuable to capital market participants. We find a negative and significant association between the incremental accrual component of earnings and management forecast errors, over and above historical current accruals. These findings are supportive to the argument that voluntary disclosures mitigate information asymmetry and are useful in improving investors’ perception on future business performance. In terms of returns prediction, we find a significant association between the incremental accruals measure and future stock returns, implying that market participants can benefit by utilizing valuable information released through voluntary disclosed management sales forecasts.

Will cloud computing make the Information Technology (IT) department obsolete?

AbstractThe rapid adoption and growth of cloud computing is creating unprecedented change in the manner in which IT services are procured, managed, and deployed. Cloud computing is forcing firms to rethink traditional IT governance practices while raising new and fundamental questions for scholars and practitioners. This paper identifies the major areas of change and highlights governance issues that arise with the adoption of cloud computing. The focus of this paper is on the organizational impact on IT governance under cloud computing. The paper posits (1) that successful IT departments under cloud computing will transform into new roles that address internal customer‐facing issues and external cloud‐facing issues, (2) firms that mitigate information asymmetry under cloud computing will show higher firm performance, and (3) firms that offer superior cloud‐sourced IT service attributes of internal prices, quality, variety, and competition in the cloud will show higher firm performance.

Family firm identity and capital structure decisions

PurposeThe purpose of this paper is to grasp the effect of familiness on capital structure decisions in family firms, as family firm identity may be an important source of competitive advantage due to its potential to moderate relationships with stakeholders such as banks.Design/methodology/approachThe paper uses panel data from 2010 to 2014, which combine financial and structural data on 691 large private German companies. The econometric approach is a random-effect and tobit panel regression using different dependent variables relating to debt.FindingsThe study reveals that family firms have significantly higher overall and long-term debt levels compared to their non-family counterparts. Contrary to the extant literature, tangibility is not significantly related to debt in the context of family firms and the hypothesized higher usage of trade credits by family-owned businesses could not be supported.Research limitations/implicationsFuture research can improve the measurement of familiness by changing from a dichotomous to a continuous variable, acknowledging that family businesses are not homogenous. This would also enable a different econometric approach.Practical implicationsA practical implication for family firms is to actively capitalize on their identity and thus, improving the way they present themselves towards different groups of stakeholders to mitigate information asymmetries and enhance trust.Originality/valueThe paper investigates large private family-owned businesses, applies multiple dependent variables, and uses a family firm specific theoretical framework, namely familiness, to explain the family’s influence on the business.

Managerial Ability and Bank-Loan Pricing

This paper examines the impact of borrowers’ managerial ability on lenders’ bank-loan pricing and the channels through which managerial ability affects bank-loan pricing. Using a large sample of U.S. bank loans, we provide evidence that higher managerial ability is associated with lower bank-loan prices. This effect is stronger in firms with high information risk, suggesting that an important channel for managerial ability to affect bank-loan pricing is through improved financial disclosure to mitigate information asymmetry. The relation is also stronger for firms with weak business fundamentals, implying that another channel is through improved business performance. Of these two mechanisms, path analysis suggests that the business-fundamentals mechanism is the more important channel through which managerial ability affects bank-loan pricing.

Do enterprise–bank relationships improve market quality? Evidence from Taiwan

Abstract This study explores and analyzes the correlation between enterprise–bank relationships and market quality to mitigate information asymmetry problems in the securities market. Loans issued by domestic and foreign banks to a sample of companies listed on the Taiwan Stock Exchange are examined to determine the quality of the enterprise–banking relationships according to the dimensions of loan limit, syndicated loan guarantees, and loan interest rates. Market quality is empirically analyzed according to bid–ask spread, market depth, and transient volatility. The results reveal that improvements to the quality of enterprise–bank relationships is reflected in the quality of information in the stock market, and requires reducing information asymmetry between buyers and the sellers. The findings of this study provide insights into the implications of enterprise–bank relationships and may serve as a reference for the general public about reducing information asymmetry when making investment decisions and for competent authorities when formulating policies.

How does corporate social responsibility contribute to investment efficiency?

This paper examines the direct and indirect link between CSR performance and investment efficiency. Our panel dataset consists of 398 European companies listed in the STOXX Europe 600 during 2009–2014. Our first result shows that firms with high CSR performance invest more efficiently. Then, we perform our analysis distinguishing two alternative situations: underinvestment and overinvestment. Focusing on under-investing firms, we highlight that CSR performance enhances their investment levels through mitigating information asymmetry. In contrast, for over-investing firms, CSR performance reduces investment excess through mitigating free cash flow problems. Overall, these findings suggest a role for CSR in indirectly ameliorating firm-level investment efficiency through helping firms address agency problems and information asymmetry problems.

Mitigating information asymmetry through sustainability assurance: The role of accountants and levels of assurance

This paper aims to examine the usefulness of sustainability reporting in reducing information asymmetry as result of lower dispersion and higher accuracy in financial analysts’ earnings forecasts. The empirical results from an international sample of listed companies indicate that the disclosure of sustainability information alone is not sufficient in this regard as our findings indicate that information asymmetry is reduced to a greater when such information is assured, supporting the value relevance role of sustainability reporting and assurance. In addition, the empirical findings suggest differences in terms of assurance attributes (provider and level of engagement) and such differences are even more relevant when controlling the institutional context. Assurance is highly appreciated by investors in more stakeholder-oriented countries; however, in more shareholder-oriented environments, assurance affects information asymmetries only when it is provided by accounting professionals who also report a “reasonable” opinion.

Bank-firm relationship and credit risk: An analysis on Tunisian firms

This paper analyses the impact of the intensity and length of bank-firm lending relationship on Tunisian banks’ credit risk over the period 2001–2012. The sample includes 494 bank-firm relationships for 383 firms. By applying probit and ordered probit models, our results indicate that firms which engage in intense relationships with banks are less likely to encounter a credit default. In addition, these firms exhibit a higher loan quality. However, no evidence has been found for the impact of the relationship length on credit risk. Further, the findings show that private banks, unlike public financial institutions, take advantage of their close lending relationships with borrowers to mitigate information asymmetry and therefore improve their loans portfolio quality.

Are SMEs in the hospitality industry less likely to experience credit constraint than other industries in the service sector? Evidence from Latin America

Small- and medium-sized enterprises (SMEs) in the service and hospitality industries are critical for economic development in Latin America. However, due to information asymmetries, access to capital is a major obstacle for SMEs to expand their activities. Drawing from agency theory, the purpose of this study was to examine the financial constraints of SMEs in the service sector, particularly the case of hospitality firms in Latin America, due to requirements associated with mitigating information asymmetries. Using a logit model, we investigated whether financial requirements acting as mechanisms to mitigate information asymmetries, such as fixed asset collateral requirements and financial statement audits, would be associated with credit constraints for small- and medium-sized firms. We further investigated whether, due to their unique financing characteristics, SMEs in the hospitality industry would be less credit constrained than other industries in the service sector. Results suggest that SMEs subjected to collateralized fixed assets and auditing requirements, separately, were more likely to be credit constrained. However, our findings indicate that both financial requirements, when used together, decreased the likelihood of credit constraint for SMEs in the hospitality industry.

Voluntary Disclosure of Sales and the Extent of Trade Credit in Small Private Companies

We examine the association between voluntary financial disclosure and the amount of obtained trade credit in a sample of small private Belgian companies. We argue that voluntary disclosure can help small private companies in mitigating information asymmetries that arise between the company and their suppliers. Using a propensity score matching procedure to control for selection bias, we find that voluntary financial disclosure by small and private companies is positively related to the level of trade credit. This is in line with the traditional view that asymmetric or incomplete information restricts access to external funds.

Director Networks, Turnover, and Appointments

This paper analyzes the labor market (turnover and appointments) of executive and non-executive directors by means of social network methodology. We find that directors with strong networks are able to obtain labor market information that enables them to leave their firm more easily for better opportunities. Networks also mitigate information asymmetry problems of external director appointments. Furthermore, the strong impact of indirect connections is in line with the ‘strength of the weak ties’ theory. The fact that direct connections are less important signifies that the connections to people that are close and local are likely to convey redundant information, whereas connections to distant individuals are more efficient in terms of information acquisition and labor market performance improvement.

Group Lending with Heterogeneous Types

Group lending has been widely adopted in the past thirty years by many microfinance institutions as a means to mitigate information asymmetries when delivering credit to the poor. This paper proposes an empirical method to address the potential omitted variable problem resulting from unobserved group types when modeling the repayment behavior of group members. We estimate the model using a rich dataset from a group lending program in India. The estimation results support our model specification and show the advantages of relying on a type-varying method when analyzing the probability of default of group members.

Culture, Capital Structure, and Implications for Accounting Regulation

We examine culture as a determinant of capital structure. Our motivation is twofold. First is to contribute to the literature on the determinants of capital structure, which is currently replete with mixed findings. Second is to explore accounting policy implications. Our measure for capital structure is leverage, the debt‐to‐assets ratio. Using Hofstede's dimensions of culture, we compute SECRECY, a measure of secretiveness shown to be associated with information asymmetry and risk aversion. We use 284,158 firm‐years from 46 countries over the fiscal years 1990 through 2009. Our methodology controls for determinants of capital structure identified in prior research and is robust to clustering by years and countries. We find that leverage is positively associated with SECRECY, consistent with the behavior of managers and investors under information asymmetry and risk aversion. We examine the implications of SECRECY and leverage for capital market initiatives, specifically GAAP evolution, whose primary objective is to mitigate information asymmetry. The analysis reveals a conflict of disclosure interests between the firm and lenders, especially in secretive cultures. © 2017 Wiley Periodicals, Inc.

Are Crowdfunding Platforms Active and Effective Intermediaries?

Crowdfunding platform due diligence comprises background checks, site visits, credit checks, cross checks, account monitoring, and third party proof on listed projects. Based on data from over 70% of Canadian platforms over the years 2013-2016, we find that due diligence application is associated with busyness of platform employees, sophistication of platform service indicated by fee structure, and type or complexity of campaigns. We hypothesize that due diligence facilitates fund-raising by screening lower quality projects and mitigating information asymmetries between project issuers and funders. Regression results confirm our hypothesis: due diligence is associated with higher percentage of successful campaigns and larger amount of capital raised on a platform.