Reduction Of Asymmetric Information Research Articles

Signalling or Pecking Order Theory: An Evidence From Mining and Energy Sector

Purpose: The purpose of the research is to determine the impact of asymmetric information on capital structure decisions.
 
 Theoretical framework: The perspective of the Pecking Order Theory (POT) suggests that managers are more informed about new investments than shareholders, making external financing issuance more prone to asymmetric information.
 
 Design/Methodology/Approach: The data was collected from companies in the mining or energy sectors listed on the Indonesia Stock Exchange during the period of 2007 to 2022, resulting in 647 observation units. Growth opportunities were proxied by total sales (Lang et al., 1996), and the debt ratio was used to measure capital structure decisions (Myers & Majluf, 1984). OLS regression was employed to determine the impact of growth opportunities on capital structure decisions.
 
 Findings: Annual sales are sufficiently increased, companies send positive signals, leading to the issuance of more debt than equity (Akerlof, 1970; S. Ross, 1977; S. A. Ross, 2005).. Companies follow the financing hierarchy when annual sales are lower than the signaling mechanism.
 
 Research, practical & social implications: Facts and empirical evidence have challenged the signaling and pecking order theories, leading to significant debates. The obligation of financial disclosure has resulted in a reduction of asymmetric information, consequently leading to an increase (decrease) in annual sales, which in turn causes a decrease (increase) in the debt ratio.
 
 Originality/Value: The value of the study was extended in Indonesia with abundant of natural resource (energy and mining).

Green Finance in India: Progress and Challenges

This paper deals with the developments in green finance in India as well as globally. Variety of data sources have been used to assess both the extent of public awareness and financing options for green projects. The findings conclude that while there have been improvements in the public awareness and financing options in India, a reduction in asymmetric information through better information management systems and increased coordination amongst stakeholders could pave a way towards a greener and sustainable long term economic growth.

Information Asymmetry, Financial Intermediation, and Wealth Effects of Project Finance Loans

Abstract Using a unique hand-collected sample, we study market reactions to mining developers announcing project finance loans. We document a significant three-day abnormal return of 2.6% and a 3.4% reduction in abnormal bid-ask spread around loan approvals, consistent with information transfer from private lenders to equity holders and reduction in asymmetric information. Cross-sectional analysis reveals a negative association between announcement return and hedging requirements specified in loan contracts, which becomes insignificant after controlling for treatment effects of hedging. Specialist banks do not charge lower rates but are more likely to impose hedging requirements, consistent with rent extraction due to bargaining power. (JEL G30, G32)

Credit information and financial development

AbstractThis article evaluates the possible effects of the presence and coverage of credit bureaus over financial development. In order to achieve this objective, this study uses International Monetary Fund aside from World Bank database and standards, more specifically financial development and credit bureau coverage variables. Results indicate a positive impact of credit bureaus over financial development. The potential channel associated with this effect might be related to the information produced by credit bureaus, which implies a reduction in asymmetric information in credit markets, thus, leading to a lower level of risk associated with borrowers and, consequently, reducing the risks faced by banks. With lower levels of uncertainty and risk, banks tend to lend more, improving financial development, which could suggest the adoption of a policy to create or stimulate credit bureaus coverage.

Information asymmetry and dividend policy of Sarbanes-Oxley Act

PurposeThe literature of financial economics documents a causal relationship between the level of information asymmetry in the firm and its dividend policy. Nevertheless, this relationship suffers endogeneity problems arising from reverse causality and omitted variable bias. The purpose of this study is to examine how the dividend policy reacts to changes in asymmetric information in an exogenous research setting.Design/methodology/approachTo overcome endogeneity concerns, the authors employ the enactment of the Sarbanes-Oxley Act (SOX) in the US in 2002 as a source of an exogenous variation in the level of information asymmetry to study the potential effect that this variation might have on the dividend policy. In doing so, we utilize a difference-in-differences research design, in which the treatment group is US publicly traded firms that were exposed to the policy and the control group is publicly traded companies in the UK where SOX was not enacted. Both countries have similar institutional settings and enforcement of laws, which makes them comparable in this research context.FindingsThe authors’ findings show that, compared to UK companies, US firms increase their dividend payments following a reduction in asymmetric information as a result of the SOX enactment.Originality/valueThe study contributes to the literature of financial economics by showing that policy makers can mitigate agency conflicts and protect shareholders by improving the corporate information environment and reducing asymmetric information.

The effect of information shocks on dividend payout and dividend value relevance

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers & Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.

Transparência, desempenho e risco: uma análise do comércio eletrônico

Dentre os mecanismos de Governança Corporativa propostos pela Teoria da Agência, aquele que potencialmente proporciona maior redução da assimetria informacional é a transparência. Assim, utilizando-se de regressões com dados em painéis e de testes paramétrico e não paramétrico de diferenças de médias, os resultados significantes dessa pesquisa indicam que as empresas de comércio eletrônico negociadas na NASDAQ são mais transparentes e apresentam maior desempenho e menor risco que empresa similar listada na BM&FBOVESPA. Esses resultados também apontam que as empresas mais transparentes apresentam, na média, maiores desempenhos e maiores riscos. Nos períodos de crise, observa-se o aumento tanto no desempenho quanto no risco. Entretanto, a interação entre crise e transparência indica que as empresas mais transparentes são menos arriscadas e, também, reportam menores desempenhos, visto que gerenciam menos os seus resultados.

COLLATERAL REQUIREMENTS FOR SME LOANS: EMPIRICAL EVIDENCE FROM THE VISEGRAD COUNTRIES

The purpose of this paper is to examine the determinants of collateral for small and medium enterprises (smes) in the context of Visegrad countries: Czech Republic, Slovak Republic, Hungary and Poland. The data set for this paper was obtained from the Business Environment and Enterprise Performance Survey (BEEPS), which was conducted by the World Bank and the European Bank for Reconstruction and Development (EBRD) from 2012–2014. A binary logistic regression model with different specifications was employed to examine the effect of independent variables on the incidence of collateral. The results show that risky borrowers need to pledge collateral and the reduction of asymmetric information can lower the incidence of collateral for smes. Moreover, we find that female borrowers are more likely to pledge collateral than male borrowers are. The results also suggest that loans with a longer maturity are more likely to be collateralized than short-term loans. We find evidence that bank-borrower proximity can alleviate the incidence of collateral whereas bank concentration may increase collateral requirements. Policy makers may consider these results to implement policies that can promote bank competition and can lower collateral requirements for female borrowers. The paper contributes to the ongoing debate on the determinants of collateral.

Full adoption of IFRSs in Brazil: Earnings quality and the cost of equity capital

The purpose of this paper is to investigate the impact of IFRS adoption on the earnings quality and the cost of equity capital of Brazilian companies. It is assumed that an increase in information contributes to a reduction in asymmetric information. A conjecture is that more efficient allocation of resources will result in a reduction in the cost of capital. The results show that the hypothesis of an increase in earnings quality after IFRS adoption holds true. The models used to analyze the equity cost of capital suggest a reduction in the cost of capital of around 7 basis points.

Ordnungsökonomische Aspekte der Sharing Economy / Sharing Economy and Regulation

Zusammenfassung Während lange Zeit die Übertragung des Eigentums an Gütern im Fokus wirtschaftlicher Austauschprozesse stand, gewinnen das Teilen und das gemeinsame Nutzen vorhandener Ressourcen zunehmend an Bedeutung. Zusammengefasst wird dieses Phänomen unter dem Begriff der Sharing Economy. Im Beitrag wird zunächst ein Überblick über die verschiedenen Arten und Ausprägungen sowie die Effekte der Sharing Economy auf Basis der vorhandenen Literatur gegeben. Die der Sharing Economy nachgesagten Effekte werden anschließend ökonomisch bewertet. Kernergebnisse sind erstens, dass die Vorteile, die der Sharing Economy nachgesagt werden, wie etwa der Abbau von Informationsasymmetrien oder eine höhere Auslastung bestehender Ressourcen, durch den allgemeinen technischen Fortschritt und damit auch durch herkömmliche, nicht-Sharing Unternehmen realisiert werden. Zweitens verhalten sich die Unternehmen im Rahmen der Sharing Economy ähnlich wie alle anderen Unternehmen. Eine gute Erklärungsgrundlage für das Verhalten ist hierbei die Theorie mehrseitiger Marktplätze. Drittens sind der Erfolg und der vermeintliche Vorteil der Sharing Economy häufig dadurch zu erklären, dass sich diese Unternehmen nicht an die gegebene Regulierung halten. Dies ist aus ordnungsökonomischer Sicht äußerst problematisch, da hierdurch kein fairer Wettbewerb gesichert wird.

Full Adoption of IFRS in Brazil: Earnings Quality and Cost of Equity Capital

The purpose of this paper is to investigate the impact of full adoption of IFRS on earnings quality and the cost of equity capital of Brazilian public companies in the period of 2000-2011. Given the multidimensionality of accounting information quality, the portfolio approach was adopted, which is restricted to the analysis of: i) earnings management (EM); ii) conditional conservatism; iii) value relevance; and iv) timeliness. Moreover, assuming an increase in information after full adoption, this contributes to the reduction of asymmetric information in the capital market. A reasonable conjecture is that there will be a reduction in the cost of capital given the more efficient allocation of resources. This empirical study was based on a panel data approach and differences in differences. The sample was defined from the theoretical portfolio IBrX-100, as well as utilizing 30 companies that adopted IFRS in advance. The results show that the hypothesis of an increase in accounting information quality after IFRS full adoption holds true. On the other hand, the models for analyzing the equity cost of capital, based on Li (2010), suggest a reduction in the cost of capital of around 7 basis points for companies that adopted IFRS mandatorily starting in 2010.

INCOME SMOOTHING IN COMPANIES LISTED IN LEVELS OF BOVESPA'S CORPORATE GOVERNANCE

O alisamento de resultados contábeis tem sido amplamente discutido e estudado em meio acadêmico e profissional, especialmente devido à insegurança provocada por recentes escândalos financeiros no mercado de capitais, podendo ser entendido como um tratamento dado pelos gestores às demonstrações contábeis a fim de diminuir flutuações no lucro, divulgando informações contábeis distorcidas aos usuários externos. A pesquisa objetiva analisar os indícios do alisamento de resultados nas empresas listadas nos segmentos de governança corporativa da Bovespa, tendo como amostra 90 companhias nos quatro níveis. Para tanto, averiguou nas empresas a existência de alisamento de resultados em suas demonstrações contábeis, aplicando-se uma métrica de alisamento de resultados apoiada em um modelo por análise de coeficientes de variação do lucro e das vendas proposta por Eckel (1981), onde foi analisado o comportamento das oscilações nos lucros e vendas das companhias. Por meio do estudo foi possível analisar a real existência de alisamento de resultados nos níveis de governança corporativa da Bovespa, observou-se que mesmo nas empresas que fazem parte dos níveis de governança, onde se idealiza uma possível diminuição da assimetria de informações entre os usuários das informações financeiras, houve a prática do alisamento de resultados contábeis em cerca de 20% da amostra.

Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information

Abstract An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers have ex ante private information. There is no clear empirical evidence regarding the central implication of this literature – that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the economic importance of this theory.

Reduction of Asymmetric Information Through Corporate Governance Mechanisms – The Importance of Ownership Dispersion and Exposure toward the International Capital Market

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: The purpose of this study is to examine how differences in “ownership dispersion” and “exposure to the international capital market” affect the particular use of the corporate governance mechanisms “transparency” and “board independence” in listed companies.Research Findings/Insights: Our findings are based on a Danish dataset that includes 100 listed companies. We find that transparency is a more important corporate governance mechanism for companies with exposure to the international capital market, while differences in ownership dispersion do not affect the use of the transparency mechanism. In contrast, we find that board independence in the context of a two‐tier board member system is an important corporate governance mechanism for companies with widely dispersed ownership and not for companies with exposure to the international capital market.Theoretical/Academic Implications: The relationships identified in our study contribute to improved understanding of the contextual relationship between good corporate governance and the companies' choice of corporate governance mechanisms within a given corporate governance system. This is important in order to interpret inconsistencies in prior research findings and provide insight for the design of future studies into the seemingly endogenous nature of many corporate governance relationships.Practitioner/Policy Implications: The requirement to adhere to the “comply or explain rules” for corporate governance has become commonplace for listed companies. The study provides insight into valid reasons for differences in compliance. Regulators and other capital market participants should acknowledge that companies may differ in their use of corporate governance mechanisms for various reasons, including differences in ownership dispersion and exposure to the international capital market.

The value of the floor

Existing theoretical literature suggests that floor trading has discernable benefits over electronic trading. In particular floor relationships lead to a reduction in asymmetric information and hence lower spreads. The ability of floor brokers to participate in incoming order flow without revealing their supply and demand curves increases total liquidity and dampens liquidity shocks leading to lower volatility. We develop hypotheses and test them on a sample of stocks that switch from floor trading to an electronic system with fairly identical rules and pre-trade transparency. We find strong support for existing theory and our hypotheses. In particular asymmetric information and volatility are significantly higher on the electronic system. This leads to an increase in investor transaction costs which dwarfs the operational cost advantages of the electronic systems. Our results are robust to tests involving samples that control for company specific factors and market wide trends.

Disclosure and the Cost of Capital: Evidence from the Market's Reaction to Firm Voluntary Adoption of IAS

Abstract: Using a unique international setting where the effects of disclosure on firm value can be measured in a constant regulatory environment and in isolation of other confounding factors, this paper shows that firms can increase their value through their choice of accounting standards. Specifically, we document strong positive abnormal returns at the announcement of voluntary adoption of International Accounting Standards (IAS / IFRS) by a sample of international firms and an economically significant reduction in long‐run returns, consistent with a reduction in the cost of capital. Consistent with these results we also document evidence of an upgrade in analyst recommendations after the IAS / IFRS adoption announcement and a reduction in the implied cost of capital. Finally, we find strong evidence that the documented abnormal returns are consistent with signaling and bonding benefits stemming from the reduction in asymmetric information. Our results highlight the importance of increased disclosure on minority shareholder protection and on corporate governance in general.

The Value of the Floor

Existing theoretical literature suggests that floor trading has discernable benefits over electronic trading. In particular floor relationships lead to a reduction in asymmetric information and hence lower spreads. The ability of floor brokers to participate in incoming order flow without revealing their supply and demand curves increases total liquidity and dampens liquidity shocks leading to lower volatility. We develop hypotheses and test them on a sample of stocks that switch from floor trading to an electronic system with fairly identical rules and pre-trade transparency. We find strong support for existing theory and our hypotheses. In particular asymmetric information and volatility are significantly higher on the electronic system. This leads to an increase in investor transaction costs which dwarfs the operational cost advantages of the electronic systems. Our results are robust to test involving samples that control for company specific factors and market wide trends.

Reduction of Asymmetric Information Through Corporate Governance Mechanisms - The Importance of Ownership Dispersion and International Orientation

Manuscript Type: Empirical Research Question/Issue: Is the reduction of asymmetric information through Corporate Governance mechanisms more important for some listed companies than for others? The purpose of this study is to examine how differences in and affect the particular use of the Corporate Governance mechanisms and in listed companies. Research Findings/Insights: Our findings are based on a Danish dataset which includes 100 listed companies. We find that transparency is a more important Corporate Governance mechanism for companies with an international orientation, while differences in ownership dispersion do not affect the use of this mechanism. In contrast, we find that board independence is a more important Corporate Governance mechanism for companies with dispersed ownership while international orientation has less importance. Theoretical/Academic Implications: The study contributes to an improved understanding of the circumstantial relationship between good Corporate Governance and good corporate performance. This is important in order to interpret differences in prior research findings and provide insight for the design of future studies of the seemingly endogenous nature of many Corporate Governance relationships. Practitioner/Policy Implications: The requirement to adhere to the comply or explain rules for Corporate Governance has become commonplace for listed companies. The study provides insight into valid reasons for differences in compliance. Regulators and other capital market participants should acknowledge that companies may differ in their use of Corporate Governance mechanisms for various reasons, including differences in ownership dispersion and international orientation.

Why Do Borrowers Pledge Collateral? New Empirical Evidence on the Role of Asymmetric Information

An important theoretical literature motivates collateral as a mechanism that mitigates adverse selection, credit rationing, and other inefficiencies that arise when borrowers hold ex ante private information. There is no clear empirical evidence regarding the central implication of this literature — that a reduction in asymmetric information reduces the incidence of collateral. We exploit exogenous variation in lender information related to the adoption of an information technology that reduces ex ante private information, and compare collateral outcomes before and after adoption. Our results are consistent with this central implication of the private-information models and support the empirical importance of this theory.

The wealth of nations rediscovered: integration and expansion in American financial markets, 1780-1850

1. Introduction: The Wealth of Nations and national wealth 2. The international and colonial background of America's financial revolution 3. Banks, securities markets, and the reduction of asymmetric information 4. The financial sector and the reduction of lending-related costs and risks 5. Evidence of capital market integration, 1800-50 6. Expansion of the securities services sector, 1790-1850 7. The freest of the free: regulation of the financial sector 8. Finance-directed economic movement 9. Conclusion: the wealth of nations rediscovered.