Reduce Information Asymmetry Research Articles

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.

IPO conditional conservatism, underpricing and post-issue stock market survival

PurposeWe examine the association between conditional conservatism in initial public offering (IPO) underpricing and post-issue stock market survival in the U.S.Design/methodology/approachWe adopt an archival approach by collecting data for 1,761 U.S. IPO issuers for the period 1990–2017. Regression analyses are conducted to evaluate the association between conditional conservatism in initial public offerings with underpricing and post-issue stock market survival. We identify firms that went public in the period 1990–2012. These firms are then followed for five years after the IPO to assess their stock market survival.FindingsWe find that pre-issue conditional conservatism is significantly associated with less IPO underpricing. We also detect that IPO firms with higher levels of conditional conservative reporting are more likely to survive in the post-IPO stock market in the three-, four-, and five-year periods after the IPO. Our main findings are robust after controlling for other factors in our models, such as IPO cycles, venture capitalists, research and development investment, and pre-IPO accounting performance.Originality/valueWe extend research by demonstrating that conditional conservative reporting practices help firms reduce their indirect costs of raising their initial public capital. Additionally, our research introduces new evidence on the association between pre-IPO conditional conservatism and after-issue stock market survival. Our findings empirically support the International Accounting Standards Board’s (IASB) decision to reintroduce the concept of prudence into the conceptual framework, by showing how conservative reporting can reduce information asymmetry in IPO firms.

Margin trading, short selling, and information asymmetry

We investigate the impact of margin trading and short selling (MTSS) on information asymmetry using data from a unique Chinese pilot program that permits MTSS for a specific list of stocks. We establish a theoretical framework indicating that MTSS enhances the pricing system’s informativeness, leading to reduced information asymmetry. Motivated by this theoretical framework, we design a quasi-experiment to analyze data from 2013 to 2016. We find that indeed MTSS weakens information asymmetry. Furthermore, the reduction of information asymmetry can be attributed to both margin trading and short selling.

Unleashing stock volatility and its implications for stock crash risk: Evidence from China’s price limit policies

This study investigates the causal effects of increased daily stock volatility on the stock price crash risk. We examine the 2020 adjustment of price limits in the Chinese stock market, which significantly increased stock volatility, using it as a quasi-natural experiment. We employed a difference-in-differences approach, and our findings reveal that firms listed on the ChiNext board experienced reduced crash risk following the relaxation of price limits. This reduction is attributed to the influence of price limits on corporate governance, in which a more pronounced effect is observed in firms with less efficient governance structures. Further, we note that wider price limits prompt reduced information asymmetry between firms and investors, which subsequently mitigates stock price crash risk. Reduced crash risk is notably more evident in state owned firms and in firms inside the high technology industry. Our study illuminates how daily price limit relaxation affects the withholding of adverse news and offers significant policy implications for emerging financial markets.

Board of directors effect on environmental, social and governance performance in publicly traded non-financial firms

Purpose This study aims to examine the effect of the board of directors (BoD) structure on environmental, social and governance (ESG) performance in publicly traded non-financial firms from the perspective of agency theory, with investors as the principal, the management team as the agent, the BoD as an information system that reduces information asymmetries between them and ESG performance as a shareholder’s expectation. Design/methodology/approach Sample data is cross-sectional as of January 2023 and includes 1,695 non-financial firms listed in 59 stock markets across 54 countries. Data were sourced from the FactSet Research Systems database. The generalized least squares method was used to run quadratic and exponential models to assess the research hypotheses. Findings Results revealed that board size, independence, age, gender diversity and participation on other corporate boards have a nonlinear relationship with ESG performance. Board tenure is the only BoD attribute for which a nonlinear association is not found. This study found that firms with larger boards and more female board members tend to exhibit a stronger commitment to ESG performance. In contrast, companies with a board of directors consisting of independent members, advanced age, service on other corporate boards and CEO duality may struggle to prioritize positive ESG outcomes. Originality/value This study contributes to the academic discussion on BoD–ESG by examining nonlinear relationships among a large sample of publicly traded firms; providing results that could be applied internationally; using ESG data that is based on the Sustainability Accounting Standards Board's materiality framework, which identifies key ESG factors for investors; emphasizing the significance of diversity and inclusion within the decision-making bodies of public companies, thereby improving their ESG performance; and supporting the agency theory perspective and suggesting that the effect of board structure on ESG may reflect the board's focus on investors’ best interests.

Economic policy uncertainty and environmental, social and governance (ESG) disclosure: the moderating effects of board network centrality and political connections

PurposeThis study aims to examine the relationship between economic policy uncertainty (EPU) and environmental, social and governance (ESG) disclosure and the moderating role of board network centrality and political connections on the nexus between EPU and ESG.Design/methodology/approachUsing a sample of the UK Financial Times Stock Exchange (FTSE) 350 firms during 2007 to 2018, this study examines the relationship between EPU and the ESG disclosure and the moderating effects of board centrality and board political connections using multivariate regression analysis.FindingsThe results show that firms tend to increase their ESG disclosure when EPU rises. The results also reveal that EPU is negatively associated with firms’ financial performance and ESG performance is less evident for firms with higher ESG disclosure scores and is observed only when board centrality is relatively low and the political connections are absent. The study finds further evidence to support the hypotheses during periods of heightened conflicts (i.e. global financial crisis and the Brexit referendum).Practical implicationsThis study offers practical insights for corporate managers who attempt to preserve and enhance their firms’ competitive advantages via maintaining its stakeholders support through greater ESG disclosure during heightened EPU periods.Originality/valueBy integrating the resource-based view (RBV) and the signaling theory, this study extends the signaling theory and RBV by examining the relationship between EPU and ESG disclosure as a signal to its stakeholders and information advantages that board centrality and political connections bring to the company to reduce information asymmetry between the firms and its stakeholders during EPU.

Has fintech affected the credit loan scale of urban commercial banks in China?

ABSTRACT This study aims to empirically examine the impact of financial technology (fintech) on the credit loan scale of urban commercial banks in China. Using panel data from Chinese urban commercial banks spanning 2011 to 2020, the study employs the Financial Technology Development Index to measure fintech development. The findings indicate that fintech significantly increases the credit loan scale of urban commercial banks. Heterogeneity analysis reveals that the magnitude of change in credit loans is more pronounced in urban commercial banks with larger scales and higher governance levels. The findings further indicate that fintech improves the information acquisition and processing capabilities of urban commercial banks, reducing information asymmetry and expanding the scope of credit services, particularly benefiting small and medium-sized enterprises. The study underscores the importance of technological innovation for banks to enhance risk assessment and address liquidity challenges. It also highlights the need for regulatory supervision to ensure the responsible use of fintech. Overall, the study contributes to the understanding of how fintech influences the credit loan scale of urban commercial banks and offers insights for banks and policymakers to leverage fintech for sustainable financial development.

Can the Presence of Big 4 Auditors in IPO Prospectus Reduce Failure Risk?

This paper addresses a void in the research on auditing and initial public offering (IPO) failure by investigating the impact of the Big 4 auditing firms on the likelihood of an IPO failure. This research is the first comprehensive analysis of more than 33,000 global IPOs that either failed or were successful between 1995 and 2019 across a wide range of nations with vastly different regulatory, cultural, and economic settings. A cross-sectional probit regression model is utilized to investigate the influence of hiring the Big 4 auditing firms on IPO failure, building upon prior studies on IPO failure. We found strong evidence that IPO failure rates were diminished by up to 67% when one of the Big 4 auditing firms was involved in auditing the IPO prospectus. For IPO founders, hiring Big 4 auditors before an IPO is a quality signaling strategy that minimizes the risk of a failed IPO by reducing information asymmetry among IPO participants. Our findings provide useful policy implications. Hiring one of the Big 4 auditing firms before an IPO is a reassuring signaling strategy for founders, since it decreases information asymmetry among IPO investors and so lowers the risk of the IPO failing. Primary market investors now have access to credible evidence indicating that backing IPOs from companies that use the Big 4 auditing firms increases the likelihood of such IPOs being listed on stock exchanges and yields positive returns. This is the first time, as far as the academicians are aware, that conclusive evidence has been found of a strong inverse association between the presence of Big 4 audits and failure risk for IPO firms. Our research could be helpful to primary market regulators since it shows how crucial it is to encourage Big 4 audits in IPO companies. The quality work of the Big 4 auditors does lower the risk of failure in the IPO market, which might help owners of small private equities to list their firms on the IPO market, boosting economic growth.

Dispersion in news sentiment and M&As outcomes

We suggest that dispersion in news sentiment, representing the dispersion in informative M&A performance forecasts, effectively captures M&A information uncertainty, disseminates information about transaction risks, and enhances investors’ ability to discern high-risk acquisition attempts. We find that consistent with the information uncertainty perspective, dispersion in news sentiment is associated with higher change in the acquirer's information uncertainty, lower M&A announcement return, and lower M&A completion probability. Examining the underlying channel, we show that media reduces information asymmetry between managers and investors and managers listen to the market due to the loss of reputational capital. Our findings are robust to additional analysis, endogeneity test, and robustness check. Overall, we argue that media can function as an alternative channel for corporate governance through dispersion in news sentiment.

Compliance with Centers for Medicare & Medicaid Services (CMS) 2021 price transparency requirements among proton therapy centers.

e23034 Background: Since 2019, the Centers for Medicare & Medicaid Services (CMS) has required hospitals to publish gross charges for all goods and services provided. In 2021, CMS amended this requirement to include publishing standard charge files, which include cash and payer-negotiated prices for all goods and services provided. This was enacted in an attempt to reduce healthcare prices by reducing information asymmetry and generating competition among both insurers and hospitals. Since complex proton therapy is one of the most expensive modalities of cancer treatment, we aimed to determine proton therapy center compliance with CMS price transparency requirements. Methods: We searched for online standard charge files for the 44 proton therapy centers in the United States. To assess compliance with the nine CMS price transparency criteria, we obtained prices for proton therapy using keyword searches and billing code 77525, the CPT code for the per fraction technical charge billed for complex proton treatment delivery. Results: Out of 44 operating proton therapy centers, 5 (11.4%) are free-standing private practice centers that are not affiliated with a hospital system, and thus not required to publish standard charge files per CMS policy. Of the 39 centers required to publish, 39 (100%) published their standard charge files free of charge with appropriately named files, thus meeting Criteria 1-3. Twenty-seven (69.2%) centers met Criteria 4 by including data on complex proton therapy (CPT code 77525) and Criteria 5a by including the gross charge for the service. One (2.6%) center partially met Criteria 4. Seventeen (43.6%) centers included negotiated prices for commercial insurers, thus meeting Criteria 5b, while 3 (7.7%) partially met this criterion. Twenty-two (56.4%) centers met Criteria 5c and 5d by including the deidentified minimum and maximum negotiated commercial prices, respectively. Twenty-six (66.7%) centers met Criteria 5e by listing the cash price for complex proton therapy, which is typically paid out-of-pocket by patients. One (2.6%) center partially met Criteria 5c-e. In total, 17 (43.6%) out of 39 proton therapy centers were in complete compliance with the 2021 CMS price transparency requirements. Conclusions: In summary, 17 out of 39 eligible proton centers were fully compliant with the 2021 CMS price transparency requirements in regard to complex proton radiation therapy. This suggests that deficiencies exist among hospital compliance and the CMS review process used to identify non-compliance. Future directions are aimed at expanding this analysis to include evaluation of proton center compliance with other billing codes, such as simple and intermediate proton treatment delivery. [Table: see text]

The Effect of Algorithmic Trading on Management Guidance

ABSTRACT I investigate whether algorithmic trading (AT) affects the provision of management guidance. Existing research finds that AT decreases fundamental information acquisition before earnings announcements and consequently reduces the informativeness of prices. To compensate for reduced information acquisition, I predict and find that managers at firms with more AT activity increase the quantity and quality of guidance issued at earnings announcements. Evidence is consistent with managers responding to reduced information acquisition, as opposed to changes in liquidity, and results suggest guidance in response to AT is effective at reducing information asymmetry. These findings identify a new channel through which AT affects stock price informativeness by documenting a link to managers’ disclosure decisions. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G14; G19; G10.

Применение алгоритмов машинного обучения для сокращения информационной асимметрии и прогнозирования социальных изменений на рынке труда: вызовы и возможности

This paper explores the impact of machine learning (ML) algorithms on reducing information asymmetry in the labor market and forecasting social changes, presenting challenges and opportunities for employers and job seekers alike. It addresses the issues of information asymmetry stemming from disparities in data access between labor market participants, as well as variations in the quality of information obtained, complicating the hiring and job search processes. Theoretical foundations of big data and its analysis using ML are discussed for identifying trends and patterns conducive to more efficient labor market functioning. ML methods including predictive models, clustering, classification, and text analysis are presented, describing their application in reducing information asymmetry and adapting to changing market demands. Examples of ML algorithm usage in real business processes are provided, showcasing their contribution to optimizing recruitment and personnel management processes, as well as forecasting future trends regarding significant competencies and skills. The importance of adapting to new challenges and opportunities presented by ML algorithms for maintaining competitiveness and sustainable development in the labor market is emphasized. By leveraging big data analytics, employers and job seekers can make more informed decisions, leading to more efficient labor market outcomes. However, challenges such as data privacy and algorithmic bias must be addressed to fully realize the benefits of ML in the labor market.

Does firms’ digitalization affect trade credit provision?

ABSTRACT This study examines the relationship between firms’ digitalization and trade credit provision using data on Chinese A-share listed enterprises from 2007 to 2020. We find that digital transformation significantly increases trade credit provision. The mechanism test shows that digital transformation directly reduces information asymmetry and enhances financial stability, thereby promoting trade credit provision. Furthermore, our heterogeneity analysis suggests that the positive effect of digitalization on trade credit provision is more pronounced for firms that are large and in the non-tech industries, and for firms that are in regions with high levels of digital finance development. Finally, digital transformation positively affects firm value and trade credit financing, indicating that digital transformation enhances the financing capacity of enterprises. This study not only reveals the economic consequences of firms’ digitalization on trade credit provision, it also provides a useful perspective to explain how the firms’ digitalization can enable the development of real economy and industry.

Can Words Speak Louder Than Actions? Using Top Management Teams’ Language to Predict Myopic Marketing Spending

Myopic marketing spending—curtailing marketing and research and development expenses to boost earnings—damages firms’ long-term value. Despite this, top management teams are often myopic, and by the time investors or boards detect such short-termism, it is too late to react or intervene. This research introduces a novel prediction method by analyzing the language top management teams use in earnings calls, specifically focusing on marketing and earnings emphasis, to predict future instances of myopic marketing spending. Through linguistic dependency parsing of almost 11 million sentences extracted from nearly 25,000 quarterly earnings call transcripts of 1,197 firms between 2008 and 2019, the authors demonstrate that the proposed approach can predict myopic marketing spending at a quarterly frequency for up to one year in advance. They find that an increase of one standard deviation in earnings emphasis is associated with a 23.68% increase in the likelihood of future myopic marketing spending. Investments based on the proposed approach produce 1.61% additional annual abnormal returns compared with models that exclusively use known predictors of myopic marketing spending, while offering earlier foresight and more frequent opportunities for intervention. This reduces information asymmetry for investors and boards of directors.

Fintech, information heterogeneity, and the regional distribution effects of corporate financing constraints

Considering the transformative impact of Fintech on financial structures, this paper examines Fintech's role in promoting equitable development in developing countries from the lens of credit constraints. While existing research acknowledges that Fintech reduces information asymmetry and thereby alleviates financing constraints, it overlooks the varied impacts on different types of information. This study categorizes information into two types: standardized information that can be codified and non-standardized information that requires “tacit understanding.” Using bank-enterprise relationship data in China from 2010 to 2021, we find that Fintech acts as a “double-edged sword.” It enhances banks' abilities to access standardized information, mitigating financing constraints in less developed areas, but also weakens their capability to process non-standardized information, potentially undermining these benefits. Additionally, the impact of Fintech varies depending on company size and ownership. Our study also shows that refinancing policies are more effective than fiscal subsidies in overcoming the limitations of Fintech.

Can the enterprise intelligent transformation promote accounting information transparency? Pressure from media attention

As digital technologies advance, the intelligent transformation of enterprises has emerged as a prevailing trend. By adopting sophisticated digital tools and platforms, enterprises can enhance the transparency of accounting information, thereby reducing information asymmetry between businesses and their stakeholders. This enhancement plays a pivotal role in stabilizing and developing financial markets. This study examines the relationship between intelligent transformation, accounting information transparency, and media attention using sample data from Chinese listed companies from 2007 to 2022. The findings indicate that: 1) Intelligent transformation positively impacts accounting information transparency; 2) Media attention moderates the relationship between intelligent transformation and accounting information transparency; and 3) Heterogeneity tests reveal that, compared to non-state-owned enterprises, state-owned enterprises experience a stronger effect of intelligent transformation on accounting information transparency.

Striking a balance: Resolving conflicts of interest in Hong Kong’s insurance market

Hong Kong’s insurance sector plays a vital role in the city’s robust financial landscape, contributing significantly to the economy and serving essential individual protection needs. However, ongoing governance is required to address issues that could undermine consumer confidence and market integrity. The article examines key conflicts of interest in Hong Kong’s insurance industry, including misaligned sales incentives, misleading information from agents, and lack of commission transparency. It proposes regulatory reforms such as standardized commission disclosure and the development of a “Policy Comparator” tool to empower customers and promote ethical practices. By implementing these evidence-based solutions, the insurance industry can enhance transparency, reduce information asymmetries, and incentivize suitable recommendations. Cooperation among regulators, insurers, and consumer advocates remains critical to maintain responsiveness to emerging risks and uphold customer-centric standards. Leveraging technology-enabled reforms, Hong Kong’s insurance sector is well-positioned to thrive while safeguarding vulnerable policyholders and public confidence in this crucial financial pillar.

Evolutionary sensemaking: a managerial metacognitive dynamic capability to reduce information asymmetry

PurposeHow can managers reduce information asymmetry in dyadic manager-external stakeholder relationships in a complex and evolving environment? Addressing this question has significant implications for firm survival, growth, and competitive advantage.Design/methodology/approachWe have adopted a multiparadigm approach to theory building, known as metatriangulation. We integrate the dynamic capabilities, sensemaking, and evolutionary theory literatures to theorize how managers can relate to stakeholders in a complex and evolving environment.FindingsWe propose, via a conceptual framework and three propositions, “evolutionary sensemaking” as the managerial metacognitive dynamic capability that helps managers hone their understanding based on the evolutionary changes in the stakeholder’s interpretations of information quality preferences. The framework unfolds across three evolutionary stages: sensing preferences' variation of the stakeholder, seizing preferences, and transforming for complexity alignment and retention. The propositions focus on managing complexity in stakeholder information quality preference, employing cognitive capabilities to simplify, interpret, and align interpretations for effective information asymmetry reduction.Practical implicationsTo develop the metacognitive dynamic capability of evolutionary sensemaking, managers need to train for and foster the underlying complex cognitive capabilities by enhancing their (1) perception and attention skills, (2) problem-solving and reasoning skills, and (3) language, communication, and social cognition skills, focusing specifically on reducing the complexity embedded in stakeholder cognition and diverse stakeholder preferences for information quality. Contrary to the current advice to “keep things simple” and provide “more” information to the stakeholders for opportunism reduction, trust-building, and superior governance, our framework suggests that managers hone their cognitive capabilities by learning to deal with the underlying complexity.Originality/valueThe proposed framework and propositions address research gaps in reducing information asymmetry. It enriches the dynamic capabilities literature by recognizing complexity (as opposed to opportunism) as an alternative source of information asymmetry, which needs to be addressed in this stream of research. It extends the sensemaking literature by identifying the complexity sources – i.e. stakeholder preferences for diverse information quality attributes and the associated cognitive preference interpretation processes. The article enhances evolutionary theory by delving into microprocesses related to information asymmetry reduction, which the existing literature does not thoroughly investigate.

Reaching the public with Twitter: The reputation value of CEOs

In this study, we investigate whether CEOs' use of Twitter influences their compensation. The results show that CEOs benefit from being active on social media because this participation helps reduce information asymmetry. Further, the effect of this Twitter usage becomes stronger when firms face competitive markets. We also use earnings announcements to show how CEOs' tweets can lower the deviations in stock prices around these announcements. Overall, a CEO's personal use of social media can help to reduce the information asymmetry between their firm and investors. This strategic tool benefits the CEO when negotiating compensation.

Enterprise Digital Transformation: The Engine of New Quality Productivity Growth

In the digital age, digitalization has become an important force driving economic growth and social progress. Under the guidance of new quality productivity, future economic and social development will pay more attention to the improvement of quality and efficiency, as well as the comprehensive development of people. This article is based on data from Chinese A-share listed companies from 2012 to 2022, and explores the impact and mechanism of digital transformation on new quality productivity. The results show that digital transformation can effectively improve new quality productivity, and the conclusion has withstood a series of robustness tests. In further mechanism analysis, it is understood that digital transformation enhances new quality productivity by improving enterprise innovation efficiency and reducing information asymmetry. In addition, heterogeneity testing found that the improvement effect of enterprise digital transformation on new quality productivity is more significant in state-owned enterprises with poor internal control, loose financing constraints, and property rights attributes, providing useful insights for improving new quality productivity.