Adverse Selection Risk Research Articles

Adverse Selection and Climate Risk: A Response to Ouazad and Khan (2021)

Adverse Selection and Climate Risk: A Response to Ouazad and Khan (2021)

Study of the Viability of Community-Based Mutual Health Insurances in the Department of Vélingara in 2019 in Senegal

Introduction: Access to basic healthcare services for the whole population has been a priority the successive governments in Senegal since independence. Mutual health insurance has been the driving force behind health coverage since the 2000s. This policy aimed to reach 75% coverage of the population by 2019. This study aims to describe the characteristics and also analyze the viability of mutual health insurances in Vélingara. Methodology: The mixed method was used to evaluate both the viability of mutual health insurances and the perception of the communities. Viability was evaluated in its four technical, functional, financial and institutional aspects. For the population's perception, interviews were conducted with beneficiaries, non-beneficiaries, community leaders and UHC officials. Results: At the institutional level, all of the mutual health insurances were viable and had internal regulations, a statute, a license and a bank account. On the technical level, they were exposed to the risk of adverse selection. On the other hand, from a functional point of view, none of mutual health insurances was viable, with a very low rate of retention. Finally, from a financial point of view, none of the mutual health insurances had the capacity to honor their medium- and long-term debts without resorting to external resources. In addition, the results of the survey showed a lack of information and a high cost of membership. Conclusion: All the mutual health insurances were experiencing difficulties and required urgent corrective measures and support from the state and local authorities.

Consumers’ food control risk perception and preference for food safety certification in emerging food markets

AbstractFood safety as a credence food attribute potentially leaves room for adverse selection arising from information asymmetry between consumers and suppliers. To mitigate this market inefficiency, certification works effectively when a credible control system is in place. However, in a situation where control is weak and uncoordinated, introducing certification may encounter consumer‐related behavioural barriers. The case of weak food control in an emerging market in sub‐Saharan Africa (SSA) gives us a unique opportunity to stochastically link consumers’ perception of the food control system to preference for different food safety certification options. We test the hypothesis that this perception induces consumers to depend on subjective cue food safety attributes. Using choice experiment data, we estimate a hybrid choice model that includes consumers’ perceptions of food control, accounting for measurement errors and endogeneity bias. Our results show that a strong preference for food safety may not translate into a positive valuation of any of the certification schemes when we control for consumer perception of food control. Consumers are likely to rely more on subjective cue attributes if they have negative perceptions of food control. When such cue attributes are susceptible to market manipulation, consumers become more vulnerable to the risk of adverse selection in the food market. We recommend combining market mechanisms with strengthened food control systems and boosting consumers’ confidence in food control to address asymmetric information problems in emerging food markets.

City goes dark: Dark trading and adverse selection in aggregate markets

We investigate the impact of dark trading on adverse selection in an aggregate market for trading UK stocks. Dark trading is linked to lower adverse selection risk and improved informational efficiency and liquidity in the aggregate market, even as liquidity declines in the lit market with dark trading. However, there is a trading value-based threshold when dark trading starts to induce adverse selection. We estimate that this threshold varies from around 9% for the most liquid stocks to 25% for the least liquid stocks. The overall average threshold for the 288 FTSE 350 stocks in our sample is 14%. • Low levels of dark trading reduces adverse selection risk in the aggregate market. • Liquidity declines in the lit market in line with increases in dark trading. • When dark trading value reaches a given threshold, adverse selection starts to rise. • Threshold varies from 9% for the most liquid stocks to 25% for the least liquid.

Workplace accidents and workers’ solidarity: mutual health insurance in early twentieth‐century Sweden†

AbstractDuring the industrialization period, the rate of workplace‐related accidents increased. Because of the lack of public insurance, mutual health insurance societies became the main providers of workplace accident insurance among workers. Due to large differences in accident risk, health insurance societies were potentially exposed to the risk of adverse selection, since they employed equal pricing for all members regardless of risk profile. This article investigates the impact of workplace accident risk on health insurance selection and outcomes. We employ household budget surveys encompassing urban workers in Sweden during the early twentieth century. We find evidence for a redistribution from low‐ to high‐risk‐exposed workers, as workplace accident risk had a significant and positive impact on receiving health insurance benefits, also when controlling for a variety of factors. Workers exposed to greater risks in the workplace were more likely to have health insurance but did not pay higher premiums. The redistribution from low‐ to high‐risk‐exposed workers was largely accepted and viewed as an act of solidarity between workers. Given that health insurance societies were aware of this redistribution, we argue for the presence of informed, rather than adverse, selection.

Ethics, Adverse Selection, Target Method of Sale Strategies, and Akerlof’s “Lemons” Problem

This study examines the acquisition dynamics associated with the target management’s choice to initiate the sale of the firm using the auction method. Specifically, we examine opportunistic merger and acquisition (M&A) dynamics related to the target-initiated method-of-sale decision (auctions vs. one-on-one negotiations), as a noteworthy example of Akerlof’s (1970) theory of the market for lemons. While we find a strong positive relationship between proxies of adverse selection risk and the likelihood of target initiation, robustness tests suggest target initiation itself is a unique indicator of information asymmetry in an acquisition environment. We also find that most target-initiated transactions follow an auction as the method of sale, which increases target information asymmetry advantages. While wealth accrued to both bidders and targets increases in non-target-initiated auctions, this benefit disappears when the target initiates the acquisition, causing both bidders and targets to suffer wealth losses. According to Akerlof’s theory, these wealth losses represent the cost of perceived dishonesty due to enhanced adverse section risk, which provides noteworthy implications for both business and society.

Cross-market informed trading in the CDS and option markets

This paper analyzes how informed traders balance leverage and liquidity in making cross-market trading decisions. Our findings are three-fold. Using daily data on the actively traded North American CDX Investment Grade and High Yield indexes from 2010 to 2017, first, we find robust evidence that, when the credit default swap (CDS) market is illiquid, informed traders do not hesitate to exploit their information advantage in the option market, and this manifests mainly for negative credit news. Second, we find that informed trading occurs predominantly in the option market for low-rated firms due to high adverse selection risk in the CDS market. Third, there is strong evidence of informed trading taking place in the CDS market for financial firms and we argue that this is due to the interdealer network through which CDS dealers obtain private information about other financial firms and their privileged position as market makers to be able to disguise their informed trades as ordinary market-making activities. Finally, we propose re-thinking market efficiency and how to advance it in a direction which does not privilege a small circle of financiers or create monopoly while keeping the markets liquid and tranquil at all times.

Liquidity Formation and Preopening Periods in Financial Markets

This paper studies the role of preopening periods in liquidity formation and welfare in financial markets. Because no transaction occurs during these preopening periods, their economic significance could be questioned. We model a market where costly participation and asymmetric information prevent latent liquidity from being expressed. At equilibrium, risk‐averse insiders use preopening periods to better coordinate supply and demand of liquidity by communicating liquidity needs, thus improving welfare. Partial or full communication of private signals by the insider with the asset at preopening periods does not always enhance liquidity formation, but improves welfare through reducing adverse selection risk faced by the outsider, and increasing the likelihood of her entry. Our findings have implications for portfolio management and the design of financial markets.

E-commerce supply chain management mode based on management information security

In the era of high informationization, supply chain management, as a symbol of a management era, brings us not only a new management tool, but also more importantly, updated management concepts and replanning, design, and ways to optimize business processes. The purpose of this article is to study the current information security issues that are common in China’s supply chain, such as the weak awareness of information security among corporate employees; the widespread disregard of information security management; the lack of a unified information security strategic planning and prevention mechanism; adverse selection risks and various defeats. In the specific application, starting from the overall business needs of the supply chain, referring to the framework of the supply chain information security system, through assessment and risk analysis, the security needs of the supply chain and its nodes are defined, and finally the e-commerce supply based on management information security is developed. Chain management mode. The experimental data show that the e-commerce supply chain management model based on management information security can effectively improve e-commerce operation efficiency and improve security performance. Experimental data show that the management mode of e-commerce supply chain management improves the security efficiency of e-commerce by about 20% and the operating efficiency by about 15%. The development of e-commerce is instructive.

Pulling the Plug: Retail Traders and Social Media

This paper examines the relationship between social media and retail trading activity. Using days on which social media platform connectivity is exogenously interrupted, creating a natural experiment, I measure the impact on retail trading behavior in TAQ retail identified trades and a novel dataset of aggregate positions in Robinhood. These ”outage” days are associated with a 2.5% increase in retail trading volume and concentrated mostly in retail traders selling stocks and closing positions. This increase in retail trading volume is consistent with social media serving to distract retail investors, rather than aiding in information acquisition. Institutional investors are unaffected by these days, and stocks with a high concentration of retail traders have improved bid-ask spreads consistent with the increase of retail traders lowering adverse selection risk and improving liquidity.

Acquirers’ Reception of Signals in M&A Markets: Effects of Acquirer Experiences on Target Selection

AbstractA key challenge facing acquirers is how to judge the technological and other resources of high‐tech ventures. While it is well known that acquirers can benefit from signals about targets to reduce acquirers’ uncertainty in the selection of acquisition targets, this leaves open the question of the degree to which certain acquirers would rely on a target’s signals. We argue that different levels and types of experience can shape an acquirer’s attention to high‐tech ventures’ signals. On the one hand, general acquisition experience can lead an acquirer to pay more attention to and act on signals. On the other hand, target‐specific experience developed from prior collaborations can reduce the value of signals by directly mitigating an acquirer’s risk of adverse selection. Based on a sample of over a thousand technology ventures in the US biotechnology industry, our empirical evidence demonstrates that the combination of acquirers’ experiences and targets’ signals explains who buys whom in a high‐tech industry.

The regulation of prosocial lending: Are loan ceilings effective?

Abstract Regulatory loan ceilings are commonly found in the prosocial lending sector, yet they can have unintended perverse effects. By mitigating the risk of adverse selection, loan caps catalyze co-financing arrangements between subsidized lenders and commercial banks. These arrangements can, in turn, crowd out the most vulnerable borrowers, i.e., those typically targeted by regulators. To assess this claim, we proceed in two steps. First, we build a theoretical model. Second, we test it, drawing on a rich hand-collected dataset on the clientele of an unregulated French microcredit provider that turned into a regulated institution—following a shock affecting its funding sources. Using a difference-in-differences linear probability model with propensity score matching, we empirically confirm the theoretical prediction that the imposition of a loan ceiling will lead to mission drift.

Vekâlet Kuramına Göre Türkiye’deki Otellerin Pazara Giriş Stratejilerinin Değerlendirilmesi

This study evaluates the probability of encountering a moral hazard and risk of adverse selection, which are among agency problems originated from the market entry strategies of enterprises. In this context, we conducted in depth interviews with 46 people who were hotel managers (principal and agent) at five-star hotels operating in Turkey. The data of the study was analyzed in the NVivo 12 Pro package program. We determined three main codes for a “moral hazard” dimension, which were unfair earnings, compliance with the legislation and termination of the contract, and evaluated “risk of adverse selection” dimension via free-riding and trust codes. Our results revealed that according to reports of the participants, there was no difference in the rates of encountering a moral hazard or risk of adverse selection with regard to the market entry strategy. On the other hand, it can be concluded that conducting an audit that hotel management carries out routinely reduces the risk of moral hazard and adverse selection, especially in chain enterprises, both brand and legal audits should be performed. Reports of the participants demonstrated that some hotel enterprises chose to use more than one market entry strategy concurrently. Preventing agency problems as well as economizing may be the purpose of their choices.

Let Your Light Shine: The Effect of Stakeholder Orientation on Strategic Alliance Formation

In this article, we study how a firm’s stakeholder orientation affect strategic alliance formation. Building on and extending existing literature on the determinants of alliance formation, we suggest that stakeholder orientation, defined as the degree to which a firm decides to focus its attention on stakeholder and integrate their interests and knowledge in its decision making, facilitates the selection process. In fact, a stakeholder-oriented firm improves its attractiveness as an alliance partner because it can leverage on broader relational resources for value creation, reduces the risk of adverse selection, improves its trustworthiness as a prospective partner, and develops relational capabilities that make it more comfortable in collaborating. In addition, we test the boundary conditions under which the positive effect of stakeholder orientation on alliance formation is mitigated. Accordingly, we focus on the moderating impact of (i) firm expected value creation; (ii) analyst coverage; (iii) diversification; (iv) environmental reputation. We validate our arguments using panel data on 10.579 unique firm-year observations over the period 2002-2017. We find support for our baseline hypothesis. In particular, stakeholder orientation has a positive impact on alliance formation for firms with lower expected value creation and in opaque contexts.

Short-selling, margin-trading, and stock liquidity: Evidence from the Chinese stock markets

This paper examines the impacts of two forms of leveraged trading—margin trading and short selling—on the trading liquidity of individual stocks in China. We find that trading liquidity for relevant stocks generally improves after restrictions on leveraged trading are removed. However, margin trading and short selling have opposite impacts on liquidity. During ordinary periods, margin trading benefits liquidity, whereas short selling damages liquidity; however, during market downturns, their roles are reversed. We also provide evidence suggesting that short sellers are informed traders in China and that short selling reduces stock liquidity because of the increased risk of adverse selection faced by uninformed traders.

Le Système Comptable OHADA face aux défis de la finance verte

Environmental issues and awareness of climate change are pushing companies today to adapt to a new context, limiting their harmful emissions and investing in sustainable projects that respect the environment. Thus, they can benefit from manna of financing, called green financing, adapted to their commitment. The emergence of this new method of financing challenges both professionals and researchers. As such, the purpose of this work is to make a conceptual analysis of the contribution of the OHADA accounting system in the reduction of information asymmetry under the green financing contract. To do this, two theories have been mobilized: signal theory and transaction cost theory. In a first, based on signal theory, it appears that the OHADA accounting system can be a signaling tool capable of acting on the risk of adverse selection. Secondly, based on the theory of transaction costs, it can be considered as an institutional arrangement equivalent to internalization capable of reducing the risk of moral hazard and the opportunism of managers in the context of the financing contract green.Key Words: OHADA Accounting System, Information Asymmetry, Green Funding

Innovation and market liquidity: the case of ADRs

PurposePatents and patent citations provide a solid signal to investors about a firm’s innovation agenda. This signal can be even more useful for investors demanding securities from foreign firms, given the asymmetric information and adverse selection risk they face. This study aims to examine the patenting activities in the USA performed by non-US companies that trade as American Depositary Receipts (ADRs) in US stock markets.Design/methodology/approachThe authors examine the effect on the trading volume of a sample of ADRs following the publication of their first patent in the USA.FindingsThe results show that the publication of a first patent has no effect on the liquidity of these ADRs when compared with same-country ADRs without patents.Originality/valueThis study enriches the literature on the relation between innovation, information and the stock market.

The paradoxical effects of market fragmentation on adverse selection risk and market efficiency

Unlike the US’s Regulation National Market System (RNMS), the EU’s Markets in Financial Instruments Directive (MiFID) does not impose a formal exchange trading linkage or guarantee a best execution price. This raises concerns about consolidated market quality in increasingly fragmented European markets. We investigate the impact of visible trading fragmentation on the quality of the London equity market and find a non-linear relationship between fragmentation and adverse selection risk. At moderate levels of fragmentation, order flow competition reduces adverse selection risk and enhances market efficiency by reducing arbitrage opportunities. Contrarily, high levels of fragmentation heighten adverse selection issues.

The role of supplier performance evaluations in mitigating risk: Assessing evaluation processes and behaviors

Given the level of outsourcing, supplier performance evaluation (SPE) is a critical supply chain process. SPEs are used to record supplier performance levels to inform future supplier selections, and thus mitigate the risk of adverse selection. Numerous weaknesses associated with industrial buyers' collection and use of supplier performance information call SPE effectiveness into question. The risk-related factors affecting SPE effectiveness have not been empirically explored, including misuses of the tool. This research identifies the factors affecting SPE risk mitigation effectiveness. It employs a mixed method of qualitative interviews of buyers and suppliers in order to develop a model of SPE risk mitigation effectiveness using structural equations modeling of survey data from a rare sample of 131 performance assessors. Findings implicate the importance of a thoroughly defined scope of work, an accurate SPE, and documented rating justifications. Additionally, dissonance among several performance evaluators and the fear of a supplier's dispute detract from SPE risk mitigation effectiveness. Finally, this research unveils how SPEs are weaponized, pursuing short-term gains and clouding the view of the supplier's performance thereby hindering the long-term, risk-mitigating purpose of SPEs. Two separate forms of opportunism - threat and debt - are discovered and have differing effects.

The impact of interest rate on the demand for credit in Ghana

This article investigates the impact of financial liberalization on the demand for credit in Ghana. It contributes by making suggestions pertaining to questions on the effectiveness of interest rate liberalization in driving private sector demand for credit both in the short and the long‐run, as well as the speed of adjustments to equilibrium after the implementation of the financial liberalization programme. The study results indicate that interest rate has no significant impact on the demand for credit both in the short‐run and long‐run. Moreover, inflation has a negative significant effect on the demand for credit in the short‐run. The results also suggest that about 66% of disequilibrium from the preceding year is corrected in the current year. However, these findings seem to indicates that the financial market in Ghana is not fully competitive. The oligopolistic and noncompetitive financial system may be attributable to the extreme minimum capital requirement and the emerging consolidation of commercial banks through government takeovers as well as the various credit rationing practices by banks aimed at reducing the risk of adverse selection and insolvency.