Reliability of Asset Revaluations: The Impact of Appraiser Independence

In this paper we examine whether there are differences in the reliability of asset revaluations made by boards of directors versus independent (external) appraisers. We use a sample of recognized Australian asset revaluations. As a first step we examine the determinants of the choice between director-based revaluations and those undertaken by independent appraisers. We find that independent appraisers are more likely to be used for revaluations of land and buildings and directors are more likely for investments, plant and equipment and identifiable intangibles. We interpret this as evidence of firms harnessing directors' knowledge of asset specificities. We also find that firms with less independent boards are more likely to use independent appraisers. We interpret this as evidence of substitutability between governance mechanisms.As for differences in reliability, we find that revaluations of plant and equipment that are made by independent appraisers are more reliable than those by directors. However, we are unable to detect a difference for other classes of non-current assets. We define reliability in terms of ex-post adjustments of recognized value increases. Reliability is determined by an examination of the extent to which upward revaluations are subsequently reversed.     

Corporate hedging and the cost of debt

For a large sample of U.S. firms from 1994 to 2009, we empirically examine the impact of corporate hedging on the cost of public debt. We find strong evidence that hedging is associated with a lower cost of debt. The negative effect of hedging on the cost of debt is consistent across industries, and remains economically and statistically significant under various controls and econometric specifications. A cross-sectional analysis based on propensity score matching suggests that hedging initiation firms experience a drop in cost of debt, while suspension firms sustain a jump. We confirm our findings after employing an extensive array of models to address potential endogeneity. The influence of hedging on cost of debt is mainly through the lowering of bankruptcy risk and agency cost, and the reduction in information asymmetry. Finally, hedging mitigates the negative effect of rising borrowing costs on capital expenditure and firm value.     

Information Risk and Fair Values: An Examination of Equity Betas

Using a sample of U.S. financial institutions, we exploit recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3 to test whether greater information risk in financial instrument fair values leads to higher cost of capital. We derive an empirical model allowing asset‐specific estimates of implied betas, and find evidence that firms with greater exposure to level 3 financial assets exhibit higher betas relative to those designated as level 1 or level 2. We further find that this difference in implied betas across fair value designations is more pronounced for firms with ex ante lower‐quality information environments: firms with lower analyst following, lower market capitalization, higher analyst forecast errors, or higher analyst forecast dispersion. Overall, the results are consistent with a higher cost of capital for more opaque financial assets, but also suggest that differences in firms' information environments can mitigate information risk across the fair value designations.     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

Economic consequences of implementing and communicating value based management systems

We study the consequences of implementing and communicating Value Based Management (VBM) systems on information asymmetries and the cost of capital. We analyse the firms’ reporting on internal control systems as the source of information for market participants. In addition, literature posits that improving communications with shareholders by providing additional information on value generation (Value Based Reporting, VBR) is an integral part of implementing VBM. We find that the implementation of VBM and the extent of VBR are, both individually and jointly, significantly related to lower information asymmetries and lower cost of capital. We find a slight moderation of the effect of VBM by VBR. For increasing VBR, we find that information asymmetries and cost of capital decrease more strongly for firms without implemented VBM systems. This indicates that VBR can to some extent substitute VBM. Overall, however, firms using a combination of VBM and VBR attain lower levels of information asymmetry and cost of capital. We provide evidence for the real effects of disclosure, suggesting that disclosures on internal control systems serve as a governance mechanism, reducing information asymmetries and the cost of capital by aligning shareholders’ and managers’ interests.     

中介机构信息有效性、投资策略与资源合理配置——以经济观察研究院“信任度指数”为例

本文研究中国证券市场民间分析机构信息的有效性、价值含量及其在证券市场资源配置中的作用。以经济观察研究院发布的“上市公司信任度指数”为研究对象,我们发现:信任度指数准确反映了公司的财务信息质量;该信息在投资决策中是有效的,利用其构建的对冲策略可以获得月平均2.7%的超额回报(年均32.4%)。我们的结果表明,如果投资者能够充分利用中介结构披露的信息,就可以从一定程度上缓解我国当前资本市场中的信息不对称问题,促进证券市场资源合理配置。     

会计信息可比性与劳动收入份额北大核心

利用2006-2019年沪深A股数据,本文考察了会计信息可比性对企业劳动收入份额的影响。研究发现,会计信息可比性的增强显著提高了企业的劳动收入份额,表明会计信息质量的提高有助于员工更好地分享企业的发展成果。进一步研究结果表明,(1)降低资本成本及增大自主研发强度是会计信息可比性提高企业劳动收入份额的两大作用路径;(2)会计信息可比性的增强主要提高了普通雇员的劳动收入份额,对高管劳动收入份额的影响并不显著;(3)会计信息可比性对劳动收入份额的影响存在一定异质性,当企业自身融资约束程度较高、信息透明度较低,或可比公司的会计盈余质量较强时,会计信息可比性与劳动收入份额的正相关关系更强;(4)会计信息可比性通过提高劳动收入份额,提升了企业的价值创造能力。     

Internal capital market efficiency and the diversification discount: The role of financial statement comparability

This paper investigates how financial statement comparability affects the efficiency of internal capital markets and diversification discounts in multi‐segment firms through monitoring mechanisms. Previous studies suggest that financial statement comparability improves transparency and reduces the cost of information processing, mitigating information asymmetry between managers and shareholders. Using measures of comparability and internal capital efficiency, we find that financial statement comparability has a strong positive influence on internal capital market efficiency. Further, we find that by improving the efficiency of internal capital markets, financial statement comparability indeed mitigates diversification discounts. Especially, the effect of financial statement comparability is more pronounced for firms with high information asymmetry or operating environment volatility. The results support our arguments that financial statement comparability enhances the efficiency of internal capital markets and increases firm value in diversified firms by mitigating agency problems via monitoring and corporate control mechanisms.     

Disclosure,Liquidity, and the Cost of Capital

This paper shows that revealing public information to reduce information asymmetry can reduce a firm's cost of capital by attracting increased demand from large investors due to increased liquidity of its securities. Large firms will disclose more information since they benefit most. Disclosure also reduces the risk bearing capacity available through market makers. If initial information asymmetry is large, reducing it will increase the current price of the security. However, the maximum current price occurs with some asymmetry of information: further reduction of information asymmetry accentuates the undesirable effects of exit from market making.     

Dual-class versus single-class firms: information asymmetry

I examine information asymmetry in dual-class firms in general and when they need (do not need) additional external capital. In general the results show that dual-class firms have higher information asymmetry than single-class firms. When dual-class firms need additional external financing, the gap in information asymmetry between dual-class firms and single class firms is narrower. I find that as the need of additional external capital increases, the difference in information asymmetry between dual-class and single-class firms decreases (consistent with increased disclosures). It decreases, up to a point that there is no difference in information asymmetry with single-class firms that also needs additional external capital. When using adverse selection component of bid-ask spread, the paper finds that as the need of external financing gets high, dual-class firms show lower information asymmetry 1 year before they need additional external capital.     

External financing and earnings management: Evidence from international data

Corporate financing conditions in the external capital market are significantly affected by information asymmetry, while internal financing is not. Given that earnings information influences market perceptions regarding firms’ quality, firms relying on external financing should have incentives to manage earnings to improve their financing conditions. This study investigates the effect of corporate external financing behavior on earnings management. Using a sample comprising 75,790 observations of 12,874 firms in 43 countries, we find that accrual-based and real earnings management are positively associated with firms’ reliance on external financing. This positive relationship holds especially true for firms that rely on equity rather than debt financing. We argue that reliance on external financing (especially equity financing), which is subject to problems arising from information asymmetry, generates a motive for earnings management.     

Value of Conglomerates and Capital Market Conditions

This article studies variations in the value of diversification across time under various capital market conditions. I find that when external capital is more costly at the aggregate level, the value of conglomerates increases relative to focused firms. I also find that this increase is greater for financially constrained conglomerates, such as bank-dependent or small conglomerates. My findings support the theories on the advantage of diversification over focus. They suggest that the ability to substitute external capital markets with internal capital markets creates value for conglomerates when the financing cost in external markets is high, especially for those conglomerates that are financially constrained.     

Capital Structure Choice in a Nascent Market: Evidence from Listed Firms in China

We study the capital structure decisions of listed firms in China between 1992 and 2001. The Chinese market exhibits high information asymmetry, phenomenal growth, highly concentrated ownership, and a lack of external market for corporate control. We find that Chinese firms use little long-term debt, which is positively (negatively) related to firm size and tangibility (profitability and growth options). These results are robust to the degree of seasoning after the initial public offering and private versus State ownership. Although industry membership is important, the development and growth of the stock market did not affect the long-term debt ratios over the years.     

卖空机制与食品安全——基于溢出效应的视角

卖空机制通过威慑效应约束厂商的自利动机,为食品安全治理提供了一种可行的资本市场途径。本文利用2015—2018年原国家食品药品监督管理总局披露的食品抽检数据,考察卖空强度对地区食品质量的影响。采用食品类上市公司融券余额在流通市值中占比的加权平均值度量地区卖空强度,体现了食品企业受到的卖空威慑压力。结果发现,卖空强度越大,当地整体的食品抽检质量越好。机制分析发现,卖空威胁在提升上市食品企业产品质量的同时,通过供应链协同、同群效应以及减少信息不对称的途径传导至同地区的其他企业,产生了食品质量治理的溢出效应。异质性分析显示,卖空对食品安全治理的溢出效应在要素市场发育不足、法制相对不健全和欠发达地区更加明显,卖空作为外部监管的补充机制发挥了食品安全治理的功能。因此,完善融资融券制度,适时合理地将食品类上市公司纳入融券标的,为惩治劣质食品提供资本市场手段,对确保食品安全问题“零容忍”具有现实意义。     

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.     

Financial market frictions and diversification

We find new facts that relate the evolution of firm scope to the changing frictions in external capital markets over the last three decades. We find that large, diversified publicly traded firms increase their scope during times of high external capital market frictions, such as in the recent Great Recession. Moreover, during these times firms diversify their investment needs and cash flow across industries. We also find similar phenomena outside diversified public firms. Examining the mergers and acquisitions activity of stand-alone and diversified private firms, we uncover similar patterns. In aggregate data, we find that the composition of mergers shifts from focused to diversifying and back with changes in external market conditions. Our evidence is broadly consistent with the notion that firms diversify their scope in response to tightening in external capital markets.     

Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform

In 2005, the Securities and Exchange Commission enacted the Securities Offering Reform (Reform), which relaxes “gun‐jumping” restrictions, thereby allowing firms to more freely disclose information before equity offerings. We examine the effect of the Reform on voluntary disclosure behavior before equity offerings and the associated economic consequences. We find that firms provide significantly more preoffering disclosures after the Reform. Further, we find that these preoffering disclosures are associated with a decrease in information asymmetry and a reduction in the cost of raising equity capital. Our findings not only inform the debate on the market effect of the Reform, but also speak to the literature on the relation between voluntary disclosure and information asymmetry by examining the effect of quasi‐exogenous changes in voluntary disclosure on information asymmetry, and thus a firm's cost of capital.     

Firm Size and Cyclical Variations in Stock Returns

Recent imperfect capital market theories predict the presence of asymmetries in the variation of small and large firms' risk over the economic cycle. Small firms with little collateral should be more strongly affected by tighter credit market conditions in a recession state than large, better collateralized ones. This paper adopts a flexible econometric model to analyze these mplications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states, which translates into a higher sensitivity of their expected stock returns with respect to variables that measure credit market conditions.     

The informativeness of pro forma and street earnings: an examination of information asymmetry around earnings announcements

Using adverse-selection cost as a proxy for information asymmetry, we find evidence that non-GAAP earnings numbers issued by management (pro forma earnings) and analysts (street earnings) improve price discovery. First, information asymmetry before an earnings announcement is positively associated with the probability of a non-GAAP earnings number at the forthcoming earnings announcement. Second, the post-announcement reduction in information asymmetry is greater when managers or analysts issue non-GAAP earnings at the earnings announcement and when the magnitude of the non-GAAP earnings adjustment is larger. Our results suggest that earnings adjustments by analysts and managers increase the amount and precision of earnings information and help to narrow information asymmetry between informed and uninformed traders following earnings announcements. Alternatively, the findings may be attributable to characteristics of non-GAAP firms and overall better reporting quality for those firms rather than non-GAAP earnings disclosure per se.     

Earnings Predictability, Information Asymmetry, and Market Liquidity

We investigate the relation between earnings predictability, information asymmetry and the behavior of the adverse selection cost component of the bid-ask spread around quarterly earnings announcements for NASDAQ firms. While we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to quarterly earnings announcements for firms with less predictable earnings, we find no evidence of such changes for firms with more predictable earnings. During a non-announcement period, we find that firms with relatively less predictable earnings have consistently higher total bid-ask spreads than firms with more predictable earnings. This finding suggests that firms with relatively less predictable earnings have a higher cost of equity capital than comparable firms with more predictable earning streams, ceteris paribus. Hence, earnings predictability may be a legitimate concern of managers who wish to minimize their cost of equity capital at least as it pertains to bid-ask spreads.