Abstract

The purpose of this research is to examine the effect of voluntary integrated reporting on information asymmetry in European and Asian firms and investigate size as a moderator variable to this relationship. Using a final sample of 94 firms in Europe and Asia that published integrated reports in 2016, the Ordinary Least Square is then performed to analyze the data on quarterly basis. The quarterly analysis is used to look at the relevance of accounting information decline as the time lag increases. The results show that there is an insignificant relationship between integrated reporting quality and information asymmetry which is captured by spread. In addition, the insignificant effect of size to moderate this relationship is also found. These results are supported by additional analysis. This research contributes to the existing debate about whether integrated reporting affects the market, particularly information asymmetry. To the best of the authors’ knowledge, this is the first study to examine the effect of integrated reporting quality on the market on a quarterly basis.

Introduction

Integrated reporting (IR) in recent years has received great public attention particularly after the formation of the International Integrated Reporting Council (IIRC) and the issuance of IR iguidelines (Adams, 2017; Zhou et al., 2017). Despite the critique arising that IR could be yet the tool for corporate impression (Melloni et al., 2017), the IIRC (2013, p. 3) stated that IR can improve “the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital.” Integrated reporting aims to reduce the clutter of sustainability report by disclosing aspects they consider to be material and useful about the value-creating activities in the short, medium, and long-term into a concise and coherent report (Zhou et al., 2017; IIRC, 2013). Integrated reporting offers a broader picture of the new firm by shifting away from standalone sustainability or social responsibility reports towards an integrated report that delivers a comprehensive picture of long-term performance from various perspectives, business model, and value creation (Burke and Clark, 2016). Hence, the voluntary information disclosure is a way to mitigate the information asymmetry problem and lead to better business transparency (Brammer and Pavelin, 2006).

Nevertheless, empirical evidence on the IR benefit is still sparse (De Villiers et al., 2014). Previous studies conducted by Zhou et al. (2017) and Vitolla et al. (2020) found an inverse relationship between alignment of integrated reports and information asymmetry, measured by analysts’ forecast errors, as well as cost of equity capital. Other studies conducted by Maria et al. (2017), Akker (2017), Martinez, 2016a, Martinez, 2016b, Lee and Yeo (2015) found that IR offers more relevant information. Thus the alignment of corporate reporting with the integrated report is negatively associated with the asymmetric information. Barth et al. (2001) also suggested the evidence that IR quality reduces information asymmetry as captured in a lower bid-ask spread. On the contrary, Stubbs and Higgins (2014) found evidence that IR did not affect a decrease of the level of information asymmetry. They argued that the information provided is not required by the capital providers to make the investment decisions. Accordingly, the limited evidence and inconsistent results found about the market responds to the information available in the integrated reports (Mervelskemper and Streit, 2016).

Conclusions

This research examined the existence of a negative relationship between voluntary integrated reporting and information asymmetry for 94 firms in Europe and Asia in 2017 with publishing an integrated report in 2016. The results show that there is an insignificant relationship between the integrated reporting quality and information asymmetry which is captured by the spread. There is no significant effect as well for size effect to moderate the relationship between the integrated reporting quality and information asymmetry. Those results are also supported by additional analyses.

These findings could be relevant for some aspects of the literature especially in the research design where this study used a continuous variable based on detailed content analysis instead of a dummy variable to measure the integrated reporting quality. Other innovations of this study are that it investigated the IR effect on a quarterly instead of an annual basis. From a practical perspective, as the significant effects are not yet observed, this result can provide the companies with insight on whether to implement the integrated reporting immediately or not. Investors who are interested in the integrated reporting also can consider this finding in their decision making. Finally, the IIRC as the regulator body can conduct some improvements to see how the integrated reporting is proceeding, particularly in the voluntary context. As the IR concept is relatively a new area for corporate reporting in the world, the governments are given the consideration and insight as well whether to encourage the companies in their countries to adopt this trend immediately or not.

Abstract

This study investigates how voluntary International Financial Reporting Standards (IFRS) adoption impacts information asymmetry in the stock market. We analyze data from firms in Japan, where local accounting standards have substantially converged with IFRS but are more rules-based than principles-based IFRS. These different implementation approaches allow us to investigate how increased accounting flexibility influences recognition and measurement practices, attenuating the effects of accounting standard differences on the level of accounting rule existence or non-existence. We find that information asymmetry increases after voluntary IFRS adoption, which is driven by small- and medium-sized IFRS adopters’ decrease in earnings quality after voluntary IFRS adoption. Additional analyses reveal that firms’ reporting incentives and accounting resources influence these changes. These results suggest that IFRS’s increased accounting flexibility in recognition and measurement practices worsens the information environments of firms with weak incentives to commit to transparent financial reporting or fewer accounting resources (i.e., small- and medium-sized firms).

Introduction

As International Financial Reporting Standards (IFRS) are intended to provide investors with information that enables them to make better investment decisions, information asymmetry in stock markets is a critical potential consequence of IFRS adoption. IFRS adoption worldwide is either voluntary or mandatory. Since the 2005 mandatory adoption for firms listed in EU countries, extensive research has been conducted on the effects of mandatory IFRS adoption. However, voluntary IFRS adoption effects are relatively under-researched, especially in recent years (De George et al., 2016, Leuz and Wysocki, 2016). Understanding the effects of voluntary adoption is also important because a non-trivial number of countries either allow voluntary IFRS adoption or prohibit IFRS adoption (Song and Trimble, 2022). As of 2019, 11 % (22) of 195 countries/territories permit IFRS adoption and 6 % (11) presently prohibit it, although the latter could permit voluntary adoption in the future. This study attempts to further our understanding of how voluntary IFRS adoption affects information asymmetry in stock markets.

Prior research provides mixed evidence on the stock market consequences of voluntary IFRS adoption. Early studies on this topic focus on Germany, where local accounting standards are substantially different from IFRS. These studies provide evidence suggesting that voluntary adopters exhibit lower information asymmetry in the stock market compared to non-adopters (Gassen and Sellhorn, 2006, Leuz and Verrecchia, 2000). However, in international comparisons, Daske et al. (2008) use two proxies for differences between local accounting standards and IFRS and report inconsistent liquidity effect results. Specifically, they observe no change in liquidity after voluntary IFRS adoption in countries with small differences between local generally accepted accounting principles (GAAP) and IFRS, but a decrease in liquidity in countries with IFRS convergence processes. Therefore, how voluntary IFRS adoption affects information asymmetry in stock markets in countries whose accounting standard differences from IFRS are relatively small remains unclear. This study aims to extend this line of research.

Conclusions

Prior research suggests that voluntary IFRS adoption positively affects information asymmetry in stock markets when local accounting standards significantly differ from IFRS and is viewed as a commitment to transparent financial reporting. However, other research obtains inconsistent results for voluntary IFRS adoption effects on information asymmetry in countries with small accounting differences between local standards and IFRS. We looked closer at Japan, where local accounting standards have been converged to IFRS but have a different implementation approach (i.e., small accounting rule differences but large implementation approach differences). We investigated the effect of voluntary IFRS adoption on the stock market (i.e., changes in information asymmetry in the stock market proxied by bid-ask spread) as well as its potential reason (i.e., changes in earnings quality proxied by the absolute value of discretionary accruals). We also examined whether this effect varies according to firm size, which represents firms’ reporting incentives and accounting resources. Our study’s findings and incremental contributions to the literature are as follows.

First, we find an increase in the bid-ask spread after voluntary IFRS adoption. This result suggests that, on average, voluntary IFRS adoption worsens information asymmetry in Japan’s stock markets. Second, we observe deterioration in bid-ask spread only for smalland medium-sized voluntary adopters. Third, we examine changes in IFRS adopters’ earnings quality before and after IFRS adoption to explore a reason for the increased bid-ask spread. We find that small- and medium-sized firms report larger discretionary accruals after voluntary IFRS adoption. These results suggest that the increase in information asymmetry in the stock market results, at least partially, from the decreased earnings quality of small- and medium-sized firms after voluntary IFRS adoption. Finally, we provide some evidence suggesting that firms’ reporting incentives and limited accounting resources deteriorate earnings quality and information asymmetry at the time of voluntary IFRS adoption.

Abstract

Recently, the defense industry in South Korea has been regarded with strong suspicion since a company responsible for producing parts for the aviation sector is being investigated for cost irregularities. Many people are concerned about these issues and the government is distrustful of defense industries. If the current situation continues, the defense industry market in South Korea (henceforth “South Korea”) will be hard to maintain. The South Korean government will have to rely on importing from abroad instead of buying products in the local market. This study looked at the sustainability of earnings management adopted in the defense industry of South Korea, exploring options for the government to maintain the scheme’s soundness. In particular, we used Kothari’s discretionary accrual as a proxy of earnings management and OLS method to analyze the relationship between them. The results are as follows. Firstly the firms with a high percentage of defense sales showed significant discretionary accruals; the higher the profit, the more likely it was that earnings adjustments were made; secondly, firms that had been certified by the government for defense cost-management were proven to be effective, because the earnings management activities were low compared to those of firms that did not have the defense cost-management certification; lastly, based on the accounting rules for the cost of defense products, it was found that significant results confirming defense firms were exercising their influence, through earnings management, on the improvement of the government system.

Introduction

In South Korea, defense scandals have recently become problematic [1]. The company that produces parts for the aviation sector is being investigated for cost irregularities. There is mounting suspicion that illegal costs in the defense industry are rising. Many people are concerned about these issues and the government is distrustful of defense industries. If the situation continues, the defense industry market in South Korea will be hard to sustain. Preventing earnings management in the defense industry is thought to be the first step to achieving transparency to help strengthen South Korean military power. The South Korean government will need to rely on importing instead of buying products in the local market. In this study, the relationship between the characteristics of domestic defense firms and earnings management in South Korea were examined.

We studied the unique cost structure of the defense industry, which compensates for profits based on the costs incurred, and examined the cost-management certification system in terms of the share of defense sales, the political cost hypothesis, and the characteristics of defense firms arising from the asymmetry of cost information between the government, which is the consumer, and the defense industry, which is the supplier.

Conclusions

This study aimed to examine the earnings management behavior of firms in the defense industry in South Korea and find a solution for the government to reduce the earnings management. The results of the study are as follows.

First, firms with higher defense product sales increased their degree of earnings management. This differs from the study by Kim et al. [13] that showed that the higher the reliance on the defense industry is, the lower the reported profit is recorded. That is, for defense firms, a profit-centered system does not produce only one result, but creates different earnings management systems that can increase and/or reduce reported profit.

Second, the defense industry cost-management system, which shares cost management information about defense firms, was examined in relation to earnings management. We found that the level of earnings management was lower for the companies with the certified system than those without the system. This can be interpreted in two ways. Firstly, for a company that has the certified defense cost-management system, due to the information asymmetry between the government and the company about the decrease in costs after the implementation of the system, the level of earnings management decreased; secondly, the firms with the certified system have already received the cost-related certification from the government because they did not engage in earnings management activities. Of these two interpretations, the latter is valid because the system for cost control in defense firms has been in effect since 2012. However, because there is not enough data (4 firms in 2012, 9 in 2013, and 12 in 2014), the effectiveness of the test could not be measured.

Abstract

Introduction

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Sample, Variables, and Methodology

Results

Discussion

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Abstract

The internal audit function (IAF) has become one of the main pillars of good corporate governance. Empirical findings show that the size of the IAF varies considerably across companies. This study analyzes the relationships between selected company characteristics as determinants of intra-company information asymmetries and the size of the IAF as an indicator of intra-company monitoring. We test these relationships by analyzing comprehensive survey data obtained from chief audit executives from 283 Austrian, German, and Swiss companies. Using a nonparametric regression approach, we identify significant nonlinear relationships between company characteristics and IAF size. The empirical analysis identifies threshold levels for several metric company characteristics, such as the number of employees and the number of subsidiaries, whose relationships with the size of the IAF change its intensity.

Introduction

The level of acceptance of internal auditing as a crucial element of good corporate governance has been increasingly acknowledged (e.g., Carcello et al. 2020; Eulerich and Eulerich 2020; Gramling et al. 2004). Internal auditing can be seen as “a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes” that can “add value and improve an organization’s operations” (Institute of Internal Auditors 2016). In this context, the Institute of Internal Auditors, the worldwide standard-setting body, as well as other regulating institutions, such as the United States Securities and Exchange Commission and the New York Stock Exchange, require listed companies to implement an internal audit function (IAF). While the benefits of an effective IAF are manifold and well documented in the literature, research that provides reliable empirical insights on IAF is still incomplete (DeFond and Zhang 2014; Christ et al. 2021).

We investigate from an organizational perspective whether and to what extent several company characteristics that largely determine intra-company information asymmetries are associated with different sizes of the IAF of European companies. A special feature of the empirical method applied in this paper is that it takes into account nonlinear relationships between metric company characteristics and the size of the IAF. Also, it directly estimates the effective nonlinear relationships based on the available observations. The empirical results show that there are significant nonlinear relationships between company characteristics, such as the number of employees, the number of subsidiaries, and the intensity with which different stakeholders use IAF, and IAF size. We identify threshold levels for these metric company characteristics whose relationships with the size of the IAF change its intensity. As a result, the identified nonlinear relationships create a more holistic understanding of the determinants of the size of the IAF.

We examine the effect of a pre-IPO audit committee on IPO pricing from the perspectives of information asymmetry and agency problems. We propose a bargaining power hypothesis to disentangle the information asymmetry explanation (financial reporting quality) from the agency problems explanation (underwriter bargaining power) on IPO pricing. IPO underpricing can be reduced by increasing the financial reporting quality under information asymmetry and/or by decreasing the underwriter bargaining power under agency problems. An audit committee can raise the quality of financial reporting and reduce the bargaining power of underwriters. With a pre-IPO market, the IPO markets in Taiwan have little information asymmetry, thus leading to the weak importance of reducing information asymmetry. We show that the establishment of a pre-IPO audit committee improves IPO pricing efficiency by reducing underwriter bargaining power rather than by raising the quality of financial reporting in Taiwan.

Introduction

An initial public offering (IPO) is the process of offering shares of a firm that is transitioning from private to public status by selling stocks to a large number of diversified investors. Although information is disclosed in the IPO prospectus, it is still difficult to value an IPO because no price history is available for firms before going public. Because of the value uncertainty of IPO firms, investors cannot fully identify high-value IPOs from low-value IPOs. Leland and Pyle (1977) argue that investors benefit from knowing the true information of the issuers. However, moral hazard hampers the truthful release of information from issuers to investors. Issuers gain substantial rewards by exaggerating positive information. To overcome the existence of substantial information asymmetry between them and investors, issuers must reveal information and credible signals to the market. The best-known anomaly of IPOs is the underpricing of IPO shares that are listed for the first time. Lowry et al. (2017) indicate that most of the fundamental models of IPO underpricing focus on information asymmetry. Because of the heterogeneity of skills among investors, some investors obtain more information on the issuing firms than do other investors (Rock (1986); Amihud et al. (2003)).

1. Introduction

2. Literature review

3. Methodology of analysis

4. Empirical data and analysis

5. Conclusions

References

Abstract

In this study, structural vector autoregression (SVAR) models are used to analyze the asymmetric effects of external and internal economic factors on the exchange market pressure index (EMPI) in the Czech Republic, Iceland, Poland, and Russia. Along with the forecast error variance decompositions (FEVDs) of the SVAR models and slope-based asymmetry tests suggesting that there may be asymmetric effects on EMPI, impulse response functions (IRFs) of SVAR models for the Czech Republic and Poland indicated that improvements in the current account balance will reduce the exchange market pressure (EMP), whereas deterioration of the current account balance may create a more serious speculative attack potential in Iceland and Poland, due to the high ratio of debt to GDP. Changes in inflation may have significant asymmetric effects on the EMP; more precisely, it was found that high inflation and the interest rate environment will increase the pressure on the exchange rate in all four economies. My findings indicate that decreases in inflation rates did not reduce the EMPI in Iceland and Russia, whereas the decline in interest rates did not constitute the necessary environment for capital inflows in any of the four countries. It is also implied that, due to the changes in long-term interest rates, the formation of the expectation of depreciation of the home currency is easier than the formation of the expectation of appreciation. Furthermore, I reveal that credit conditions in the United States of America (USA) could affect global crisis expectations and thus have asymmetrical effects.

Introduction

In terms of analyzing the factors leading to variations in exchange rates, it has become critically important to study the role of international spillovers, especially after global financial crisis (GFC) and the quantitative easing policy of major central banks. In the post-crisis period, the implementation of economic policies both in developed and developing countries focused on improving their deteriorated macroeconomic economic conditions. Along with internal and external macroeconomic factors, the need for foreign funds and international capital flows has come the core of the analysis of exchange rate fluctuations, especially in developing countries. In this respect, it is critically important to understand the dynamics of the foreign exchange market to make more precise explanations about the effects of exchange rate changes in future periods. Herein, the exchange rate pressure index (EMPI) has been recognized as a leading indicator of the current state of the foreign exchange market and the future value of the exchange rate. According to Weymark (1995), exchange market pressure (EMP) measures the total excess demand for an exchange rate change that would have been required to remove this excess demand in the absence of foreign exchange intervention (FXI). Because FXIs and interest rate adjustments can be used as policy tools to decrease the EMP in developing countries, the definition of EMP has been modified. In particular, the EMPI can be defined as the summation of weighted changes in official reserves, nominal exchange rate, and interest rates (Jing, 2015). There have been many studies in the literature focusing on using different EMPI definitions and analyzing the macroeconomic and financial variables as determinants of the EMPI (Aizenman & Binici, 2016; Aizenman & Hutchison, 2012; Aizenman, Lee, & Sushko, 2012; Akram & Byrne, 2015; Feldkircher, Horvath, & Rusnak, 2014; Panday, 2015; Soe & Kakinaka, 2018). However, exchanges rates can interact with many domestic macroeconomic and financial variables, meaning that models analyzing the factors influencing EMP can be enhanced by the inclusion of domestic economic risk factors (Forbes, Hjortsoe, & Nenova, 2018). In this way, exogenous exchange rate shocks can be taken into consideration in the analysis of EMP. For this purpose, credit default swap (CDS) or the three-month LIBOR based on the US dollar minus three-month Treasury bill (TED spread), which is under the influence of both monetary and fiscal policy implementation, can be included in an empirical model as the main country risk indicators. Due to the spillover effects of the monetary policy of the US after the GFC, the inclusion of macroeconomic and financial variables of foreign countries in models examining the variations in exchange rates has also gained ground in the most recent scientific literature (Adler, Lama, & Medina, 2018; Belke & Fahrholz, 2018; Jordan, 2016).

1- Introduction

2- Data and research design

3- Main analyses

4- Extensions and robustness checks

5- Conclusion

References

Abstract

We find that both firm leverage and short-term debt ratios are negatively associated with social capital (i.e., the altruistic tendency and mutual trust among people within a community). This relation is more pronounced in cases where information asymmetry problems are more severe and is robust to using alternative measures of key variables, addressing endogeneity issues, employing alternative model specifications, and simultaneously estimating leverage and short-term debt. An analysis on debt structure (bank loans vs. public debt) shows consistent results. Our findings are in line with the idea that social capital lowers the need for corporate borrowing mechanisms as a means to alleviate agency problems for firms.

Introduction

The capital and debt structures of a firm can affect its value in many ways. One particular channel is through how they alter managerial incentives and impact investment decisions (Jensen and Meckling, 1976). In this regard, finding the optimal levels of leverage and debt maturity involves trading off the benefits and costs associated with them. For instance, using more leverage and shortening debt maturity can both alleviate problems that arise from management entrenchment (Harris and Raviv, 1990; Jensen, 1986), but at the same time introduce shareholder-creditor conflicts and liquidity risk, respectively, in addition to financial distress (e.g., Johnson, 2003; Myers, 1977). 1 Thus, an economic variable that bears the function of substituting the benefits of leverage and short-term debt, thereby lowering the associated potential costs and allowing the reallocation of resources, can be valuable to the firm. In this paper, we hypothesize that social capital fits such a role. Following Guiso et al. (2004), we define social capital as the degree of altruistic tendency and the level of mutual trust among people within a community. Plainly speaking, high social capital regions comprise of individuals that are more trustworthy, more cooperative, and less self-centered (see, for instance, Hasan et al., 2017b; Jha and Chen, 2015; Jha and Cox, 2015). We propose that managers in these areas are less likely to misbehave or take actions that may harm investors. This can be due to their society reflecting who they are, shaping who they become, or forcing them to be more concerned about reputation losses before taking value-destroying actions (Mead, 1934, p. 178). Through each of these channels, the managers are more likely to be perceived by investors as trustworthy.

1- Introduction

2- Prior literature and hypothesis development

3- Data and research design

4- Empirical results

5- Additional analyses and robustness tests

6- Conclusion

References

Abstract

Accounting big baths are pervasive in practice. While big baths can improve the information environment and reduce information asymmetry, they can also degrade the information environment and obscure operating performance. In this study, we examine the role of management ethics. Specifically, we investigate whether managers’ truthfulness (or conversely, deceptiveness) affects how investors perceive big baths. Using linguistic analysis on earnings-conference calls to measure managerial deception and employing a difference-in-differences research design with propensity-score matching, we find that information asymmetry is significantly higher following big baths taken by deceptive CEOs, compared with big baths taken by less deceptive CEOs.

Introduction

How does a firm’s information environment change after accounting big baths? Prior literature provides evidence on both positive (Elliott & Shaw, 1988; Francis, Hanna, & Vincent, 1996; Haggard, Howe, & Lynch, 2015) and negative (Bens & Johnston, 2009; Kirschenheiter & Melumad, 2002; Kothari, Shu, and Wysocki 2009; Moore, 1973) consequences of big baths on the information environment. As managers have discretion regarding whether to incur a large write-off, and can decide the timing and amount of the write-off, management’s incentives are important in studying the effects of big baths. However, such incentives are unobservable. Investors may use managerial characteristics to infer management incentives. Among the most salient managerial characteristics in this setting is truthfulness; thus this study examines how truthfulness (or conversely, deceptiveness) affects investors’ perceptions of big baths. According to upper-echelons theory (Hambrick & Mason, 1984), the ethical attentiveness throughout the organization is instilled by its leaders (Patelli & Pedrini, 2015). A series of accounting fraud scandals over the last decades put leadership ethics at the forefront of the heated debate on financial-reporting truthfulness (Mihajlov & Miller, 2012; Tourish & Vatcha, 2005). Ethics is an intrinsic part of managers’ behavior (Solomon, 1992). As firms’ high-level decision makers, top managers are likely to follow a cognitive and rational approach that revolves around moral judgments about the issues when making ethical decisions, just as an individual making a choice when facing an ethical dilemma (Albert, Scott, and Turan 2015; Kohlberg, 1981; Reynolds, 2006; Vitell, Lumpkin, and Rawwas 1991; Weber, 1990). Big baths are managerial decisions that can be the result of managers’ ethical considerations of the firms’ welfare, or can be the result of managers’ incentives to maximize their personal utility. Being truthful or deceptive to investors and other stakeholders also indicates management’s ethical choice of how they view their responsibility to the firm’s stakeholders. On one hand, big baths can manifest themselves as exceptionally large negative discretionary accruals. On the other hand, big baths can consist of one-time, large write-offs, and may include restructuring charges, asset impairments, and litigation losses. These write-offs are generally reflected as “special items” in the financial statements. There are two ways to look at a big bath. If a company reports a loss that is larger than expectations, it could be the case that there are certain issues within the firm that warrant such actions and that managers are truthfully conveying such information to the capital market and other stakeholders. In line with that view, some analysts interpret big baths as managers’ positive response to existing problems (Elliott & Shaw, 1988). Big baths can also “clear the air” (Haggard et al., 2015). That is, by writing off assets when their carrying values are less than the market values, the reported values of the assets are realigned with their economic values. As a result, firm-level information asymmetry following a big bath should decrease.

Introduction

The choice between debt vs equity is one of the major corporate finance decisions, as it directly impacts on a corporation’s cost of capital and, therefore, its value. While generally providing the lower cost of capital, the benefit of debt financing is also linked to its ability to reduce the adverse impact of equity issuances. According to the pecking order theory Myers (1984) and Myers and Majluf (1984) assert that, since management are presumably equipped with better information about the firm’s prospects, they face difficulty in convincing outside investors that they will not be paying for overpriced stocks. This forces firms to issue equity at a price lower than its intrinsic value. Firms with higher degrees of information asymmetry (e.g. lower corporate governance quality) will be more harshly penalized through deeper discounting of their equity issuances. Thus, the pecking order theory predicts that firms with a higher degree of information asymmetry are associated with higher levels of debt usage, all other things being equal. While the pecking order theory has proven to explain capital structure choices among corporations worldwide, it is at odds with the findings of Chen (2004). The author reports the new pecking order of which firms prefer the use of retained earnings, new equity issuances, and long-term debt accordingly. We conjecture that the unconventional preference of equity issuance over long-term debt may stem from the fact that Chen (2004) study period is during the time when non-tradable shares (NTS) (predominantly owned by the state). Since these NTS investors are less subject to information asymmetry problem, firms are generally less adversely impacted by new equity issuances. This gives rise to the finding that information asymmetry may not lead to higher debt financing in China (and thus less needs to use debt financing to reduce the adverse selection problem faced by equity investors). Our paper aims to empirically investigate whether Chinese corporations conform to the pecking order theory once NTS are revoked during the 2005-2007 NTS Reform period. With the NTS Reform, NTS (which contribute to a big proportion in Chinese capital market) are converted into tradable shares and become subject to information asymmetry problem. In this new environment, the role of information asymmetry on debt financing choices should become more prominent. In other words, we should detect a positive relation between information asymmetry and net debt issuances, as predicted by the traditional pecking order theory. Having mentioned that, directly testing the information aspect of a firm’s capital structure decisions is challenging due to the lack of a direct measure on information asymmetry. Recent developments in microstructure research have, however, provided new tools for researchers to detect the degree of information asymmetry faced by stock investors. Bharath et al. (2009) are the first to apply such techniques to test the pecking order theory. In their study, the positive relation between asymmetric information and leverage use is confirmed among US firms. We apply Bharath et al. (2009) techniques to investigate how information asymmetry affects the new debt issuances of Chinese listed firms in the years 2005 to 2007 NTS Reform transition period[1]. The ability of the pecking order theory to explain firms’ financing choices depends heavily on the stock market’s ability or incentive to produce information. The latter should be systematically promoted with the lifting of NTS. There is another reason why a study in the Chinese market is particularly interesting. First, it has been argued that share manipulation and insider trading are rampant in Chinese capital markets, while investor protection rights are not legally codified (see, e.g. Chakravarty et al., 1998; Chan et al., 2008).

This paper explores asymmetric information regarding the law in credit markets. The law and judicial system are assumed to be unambiguous and reliable so that the decisions are foreseeable to everyone who has legal expertise. The problem is that legally-naive lenders lack legal expertise. The law often provides special protection to a few debt categories. La Porta, Lopez-de-Silanes, and Shleifer (1998), for example, mention that in many countries payments to secured lenders are subordinated to payments to the government and workers, who have absolute priority. These laws may cause unexpected losses to legally-naive lenders whose loans are fully secured. In the UK, the law offers several orders of seniority between secured loans (Franks & Sussman, 2005). Payments to fixed charge security holders are, for instance, senior to the payments to lenders that have floating charge security. The latter lenders may suffer unexpected losses if they are legally-naive and assume that the floating charge security protects their investments. One legal attribute that may strongly reduce the market value of the collateral asset and thereby cause unexpected losses to legally-naive lenders is an encumbrance (Glen, 2011). In the US, the homestead exemption protects guarantors in most states and varies strongly among states (Gropp, Scholz, & White, 1997). The value of personal guarantee may be 1 million dollars if the guarantor lives in state A, or zero if they live in state B. The latter scenario may cause unexpected losses to lenders. Developing countries have more problems. The ownership of the collateral asset may be unclear (de Soto, 2000; Glen, 2011).1 The law in the jurisdiction may be obscure or overly complicated (de Soto, 2000; Glen, 2011). In an informal property system, titling requirements and issues of enforceability will be based on community norms and local knowledge. An outside lender may have neither the knowledge nor ready access to peculiar local information or knowledge (de Soto, 2000; Glen, 2011). Consequently, direct investments by legally-naive lenders may lead to dramatic losses and the non-intermediated market may dry up as a result. These examples raise fundamental questions. What are the impacts of asymmetric information regarding the law in credit markets? How does it differ from the standard form of asymmetric information? How can it be eliminated?

Earnings management occurs when managers use their discretion in the financial reporting process and in structuring transactions to misrepresent the true economic performance of the company (Dechow & Skinner, 2000; Healy & Wahlen, 1999). Firms can manage earnings through two types of activities: accrual-based activities and real activities manipulation. While accrual-earnings management implies discretionary choices permitted within accounting standards and with no direct cash flow consequences, real earnings management (hereinafter REM) involves deviations from normal operational practices to manipulate earnings numbers, with direct consequences for current and future firm cash flows. In this paper, we are interested in investigating the association between REM and the level of information asymmetry in the stock market. Although earnings management activities may be informative, most research adopts the opportunistic perspective, and assumes that managers try to mislead stakeholders. According to this view, earnings management reduces earnings quality and garbles the information provided by financial statements. Consequently, as Bhattacharya, Desai, and Venkataraman (2013) hypothesize, based on the model of Kim and Verrecchia (1994), if investors differ in their ability to process earnings-related information, then poor earnings quality can lead to differentially informed investors, so exacerbating the information asymmetry in financial markets. Consistent with this hypothesis, empirical evidence shows that accrual-based earnings management is associated with higher information asymmetry and reductions in market liquidity, leading to a higher cost of capital (e.g. Bhattacharya et al., 2013; Jayaraman, 2008; Rajgopal & Venkatachalam, 2011). Research has analyzed the association between earnings management (or earnings quality) and the firm’s information environment, with the focus mainly on accrual-based earnings management. Nevertheless, there is little evidence for the effect of REM on the adverse selection problem in financial markets. Since earnings management through real activities manipulation distorts earnings and cash flows, REM strategies may imply lower earnings quality, as manipulated earnings numbers hinder the evaluation and assessment of the true firm’s current performance and the expected level of future cash flows by investors. Hence, a positive association of REM with information asymmetry could be expected. Moreover, since REM is less subject to external monitoring and scrutiny by board, auditors and regulators than accruals earnings management (Cohen & Zarowin, 2010), and its implications for firm future performance are not clear (e.g. Graham, Harvey, & Rajgopal, 2005; Gunny, 2010), it may be difficult to understand by capital markets (Kothari, Mizik, & Roychowdhury, 2016) and thus, it may contribute to increase the informational asymmetry problem. As Gunny (2010) states, it is complicated to determine whether managers use REM opportunistically to the detriment of shareholders or, on the contrary, they use REM to signal future performance or to attain benefits that will allow the firm to perform better in the future. Hence, REM could increase the uncertainty of investors about the distribution of firm’s future cash flows, and, in this case, traders who have better information-processing abilities could take advantage of their superior assessments of firm performance. In addition, since it is difficult to distinguish sub-optimal from optimal business decisions, the opacity of REM activities could lead some investors to engage in acquisition of private information with the aim of exploiting it and obtaining profits from trading on the market. For all these reasons, we expect REM strategies to exacerbate information asymmetry among investors in stock markets.

One of the heated discussions on foreign direct investment (FDI) is the agency problem between managers and stakeholders. Lee and Kwok (1988) argue that legal differences, multicounty financial statements, and multicounty auditors make it difficult to monitor managers in international markets. Choi et al. (2016) report that the extent of institutional dissimilarity between institutions in home and host countries worsens monitor function of stakeholders. In addition, Singhal and Zhu (2013) argue that managers may be willing to make potentially value-destroying diversification decisions to derive and preserve private benefits such as enhanced status, high perquisites, future employment prospects, and reduced employment risk. Weak monitor function in FDI firms provides more opportunities for managers to pursue personal interests, which consequently increases agency costs. Therefore, the present study argues that managers in FDI firms may use accounting maneuvers to mislead stakeholders and lower accounting information quality in the pursuit of personal benefits such as a better compensation contracts (Healy, 1985) or improved job security (DeAngelo, 1988). Using earnings management, which is frequently applied as a measure of information quality (An et al., 2016), this study predicts earnings manipulation increases with foreign investment by FDI firms.

مقاله سال 2017

In this research, we focus on contract design under information asymmetry. This research was motivated by the need to enhance the corporate social responsibility (CSR) of a supply chain (SC). We investigate a brand-name firm that offers high-tech products (smartphones and computers) to consumers. Its supplier is a large manufacturer of computer, communication and consumer electronics. The firm believes that it can boost demand by engaging in advertising campaigns and enhancing its brand reputation through commitment to CSR. This is the case observed in the relationship between Apple Inc. and Foxconn, which is Apple’s contract manufacturer (CM) in China. Foxconn is the world’s largest electronics contract manufacturer. Tragedies occurred at Foxconn’s Chinese facilities, where 18 employees of various plants attempted to take their own lives in 2010. Most of the workers committed suicide because they were unable to bear the stress, alienation and humiliation they experienced daily. These tragic events indicated that Foxconn had not met its social responsibility. Suicides among Foxconn workers have attracted much media attention. In 2012, Terry Gou, founder and chairman of Foxconn, announced that Foxconn and Apple would jointly share the cost of improving working conditions in Chinese factories. This research aims to design contracts by considering CSR efforts in a two-stage supply chain with one dominant retailer (Apple) and the contract manufacturer (Foxconn). Our models can be generalized to similar business settings.

Other examples of CSR can be found in Whole Foods Market and JiaDuoBaoGroup. Whole Foods Market (WFM) is the world’s largest retail chain of natural and organic foods. With a strong brand image and growing market presence, WFM operates more than 400 stores in the US, Canada and the U.K. WFM decides on its CSR activity with input from stakeholders (employees, investors, customers, suppliers and communities) [1]. It raises the bar in CSR by asking suppliers and manufacturers to grow green, taking a stand on GMOs, upcycling, exploring energy savings, investing in suppliers, encouraging diversity, urging transparency, caring for employees, supporting local communities, and giving back to the global community [2]. It has enjoyed customer loyalty and satisfaction, and many customers are willing to pay more for WFM’s corporate, environmental, and ethical conscience. The JiaDuoBao Group (JDB), a foreign-funded enterprise in the British Virgin Islands that produces and sells drinks and mineral water, donates 1 million and 1.1 million to WenChuan Earthquake and the YuShu Earthquake, respectively [3]. The sales volume of JDB was 50 million in 2007, rose to 120 million in 2008, and reached 150 million in 2010 [4]. JDB’s attention to vulnerable people and social welfare (CSR efforts) has helped enhance consumers’ perceptions of brand equity, which in turn could boost demand. Moreover, Chinese businesses paid much more attention to CSR and to serving society properly in recent years. For example, 24 chemical companies pledged to share social responsibility in 2008 [5], while more than one thousand firms in Shanghai did so in 2011 [6]. Moreover, Shenzhen took the lead in launching the local standard of CSR in 2015, which encourages and incentivizes firms to exert CSR efforts [7]. With the increasing emphasis on CSR in contemporary society, our research provides a well-timed discussion and guidelines for businesses to expand and improve their CSR engagement.

Social responsibility comes at a cost and is fundamentally grounded in humanitarian obligations to employees, consumers, and others. This is a principle that Apple Inc. has publicly acknowledged. However, Apple does not have direct control over Foxconn’s operations and does not know how much CSR effort should be invested to improve the working conditions in Chinese factories. How could Apple motivate Foxconn to engage in CSR and improve its performance in employee welfare, ecological footprint and production safety?