The information superhighway

overthepastyeaps,theso-calledsupethighwayhasbecomethehottesttopic.Butwhatistheinformationsu-pethighway?AndwhatwillitmeanforpeoplewhousePcs?Theanswerstothesequestionsareasvariedasthewould-beplayers.Dependingonwhomyoutalkto,thehighwaycouldbethebiggestleaPinhumanconunnicahonssinceSPunik-Intheory,theinformaionsupethighwaywillbeahigh-sPeeddatanetwork,linkingvirtuallyeveryoneinthecountrytoevery-oneelse.ButwhenyougetdowntosPecilics--howthehighwaywillbebuilt,whatserviceswillbeonit,andhowpeoplewilla…     

Is less information better information? Evidence from the credit rating withdrawal

This paper examines the stock market reaction to two different types of credit rating withdrawals by Moody’s. The first type of withdrawal occurs when a firm stops being rated. This happens, for example, when firms choose to no longer pay for a rating. We find that the stock market reaction depends on the information which remains available. The second type of withdrawal is due to Moody’s policy of removing the issuer rating and keeping the corporate family rating for the same firm. The corporate family rating is usually more favorable than the issuer rating. The paper shows that the removal of the issuer rating leads to positive stock market reaction. We conclude that lower disclosure of rating information is not necessarily associated with higher cost of equity. Instead, our findings emphasize the incentive for firms to engage in ratings shopping by publishing only the most favourable ratings.     

Are active fund managers collectors of private information or fast interpreters of public information?

Recent studies of fund manager performance find evidence of outperformance. However limited research exists as to whether such outperformance is because of privately collected information, or merely expedient interpretation of publicly released information. In this study, we examine the trade sequences of active Australian equity fund managers around earnings announcements to provide insights into the source of fund managers’ superior information. We document an increased occurrence of buy‐sell trade sequences around good‐news earnings announcements. The evidence is consistent with fund managers having both private information about forthcoming good‐news earnings announcements and being ‘short‐term profiteers’. We find no evidence that fund managers have private information about forthcoming bad‐news earnings announcements. However, we do find an increase in the frequency of fund managers not trading before bad‐news earnings announcements only to subsequently sell during announcements.     

Does earnings acceleration convey information?

Valuation theory, investment managers, financial analysts, and textbooks advocating horizontal financial statement analysis suggest that the change in earnings growth (earnings acceleration) conveys value relevant information. We test this assertion using a large sample of U.S. firms. Results from cross-sectional short-window (around earnings announcements) and long-window (annual) returns-earnings regressions reveal a strong association between contemporaneous returns and earnings acceleration after controlling for earnings levels and changes. Moreover, earnings acceleration is useful in predicting future earnings, and financial analysts appear to use the information in earnings acceleration in addition to earnings levels and changes in revising their forecasts. Furthermore, earnings acceleration conveys information incremental to that provided by changes in analysts’ forecasts of long-term earnings growth. This study extends the empirical returns-earnings model that includes only earnings levels and changes and shows that more useful information can be extracted from reported earnings numbers than has been previously documented.     

Consumers’ avoidance of information on red meat risks: information exposure effects on attitudes and perceived knowledge

In accordance with cognitive dissonance theory, individuals generally avoid information that is not consistent with their cognitions, to avoid psychological discomfort associated with tensions arising from contradictory beliefs. Information avoidance may thus make risk communication less successful. To address this, we presented information on red meat risks to red meat consumers. To explore information exposure effects, attitudes toward red meat and perceived knowledge of red meat risks were measured before, immediately after, and two weeks after exposure. We expected information avoidance of red meat risks to be: positively related to (1) study discontentment; and (2) positive attitudes toward red meat; and negatively related to (3) information seeking on red meat risks; and (4) systematic and heuristic processing of information. In addition, following exposure to the risk information, we expected that (5) individuals who scored high in avoidance of red meat risks information to change their attitudes and perceived risk knowledge less than individuals who scored low in avoidance. Results were in line with the first three expectations. Support for the fourth was partial insofar as this was only confirmed regarding systematic processing. The final prediction was not confirmed; individuals who scored high in avoidance decreased the positivity of their attitudes and increased their perceived knowledge in a similar fashion to those who scored low in avoidance. These changes stood over the two-week follow-up period. Results are discussed in accordance with cognitive dissonance theory, with the possible use of suppression strategies, and with the corresponding implications for risk communication practice.     

Ultra-high-frequency lead–lag relationship and information arrival

To our knowledge, this paper is the first study on the effect of information arrival on the lead–lag relationship amongst related spot instruments. Based on a large data-set of ultra-high-frequency transaction prices time-stamped to the millisecond of the S&P500 index and its two most liquid tracking ETFs, we find that their lead–lag relationship is affected by the rate of information arrival whose proxy is the unexpected trading volume of these instruments. Specifically, when information arrives, the leadership of the leading instrument may strengthen or weaken depending on whether the leading or lagging instrument responds to that information. An increase in the unexpected volume of the leader strengthens its leadership whereas an increase in the unexpected volume of the lagger weakens this leadership. In addition to the strength of leadership, an increase in the unexpected volume in response to information arrival may also have opposite effects on the lead–lag correlation coefficient depending on whether that volume increase belongs to the leader or the lagger. Finally, we find that sophisticated investors have a more significant effect on the lead–lag relationship than non-sophisticated ones.     

Entrepreneurship and asymmetric information in input markets

Entrepreneurs starting new firms face two sorts of asymmetric information problems. Information about the quality of new investments may be private, leading to adverse selection in credit markets, and entrepreneurs may not observe the quality of workers applying for jobs, resulting in adverse selection in labor markets. We construct a simple model to illustrate some consequences of new firms facing both sorts of asymmetric information. The market equilibrium can involve an excess supply of workers entering the entrepreneurial sector, as well as credit rationing. Equilibrium outcomes mismatch workers to firms, and will generally result in an inefficient number of both entrepreneurs and workers opting for the entrepreneurial sector. Taxes or subsidies on new firms and on wages can improve efficiency, but a second-best optimum can only be achieved if it is optimal to induce an excess supply of workers to enter the entrepreneurial sector.     

When does a firm disclose product information?

A firm chooses a price and the product information it discloses to a consumer whose tastes are privately known. We provide a necessary and sufficient condition on the match function for full disclosure to be the unique equilibrium outcome whatever the costs and prior beliefs about product and consumer types. It allows for products with different qualities as well as some horizontal match heterogeneity. With independently distributed product and consumer types, full disclosure is always an equilibrium and a necessary and sufficient equilibrium condition is that all firm types earn at least the full‐disclosure profit.     

Does information drive trading in option strategies?

We study trading in option strategies in the FTSE-100 index market. Trades in option strategies represent around 37% of the total number of trades and over 75% of the total trading volume in our sample. We find some evidence that order flow in volatility–sensitive option strategies contains information about future realized volatility. We do not find evidence that order flow in directionally–sensitive option strategies contains information about future returns. Overall, our evidence suggests that option strategies are used both by traders who possess non-public information about future volatility and by uninformed speculators who appear to follow unprofitable trend chasing strategies.     

Are CEOs incentivized to shelter good information?

Prior theoretical studies on the agency problem hold different opinions from the empirical literature on two questions: (a) Are CEOs incentivized to shelter good information? (b) Are CEOs incentivized to evenly shelter good and bad information? This paper demonstrates that CEOs with high pay‐performance incentives tend to successfully shelter good information rather than bad information. Furthermore, CEOs with high pay‐performance incentives shelter good information by using real earnings management and textual manipulation but not accrual‐based earnings management. These asymmetric information manipulation behaviors help to decrease corporate cash flow volatility as well as the jump and crash risk on the stock market.     

Do foreigners facilitate information transmission in emerging markets?

Using the degree of accessibility of foreign investors to emerging stock markets, or investibility, as a proxy for the extent of foreign investments, we assess whether investibility has a significant influence on the diffusion of global market information across stocks in emerging markets. We show that greater investibility reduces price delay to global market information. We also find that returns of highly investible stocks lead those of noninvestible stocks because they incorporate global information more quickly. These results are consistent with the idea that financial liberalization in the form of greater investibility yields informationally more efficient stock prices in emerging markets.     

Do accruals exacerbate information asymmetry in the market?

A considerable body of evidence, both archival and experimental, suggests that accounting accruals are heterogeneously interpreted by investors. We examine whether the information asymmetry among investors arising from this heterogeneous interpretation, implied in these empirical results, affects transactions costs in the form of the adverse selection component of the bid-ask spread. We examine this impact both, in a yearly setting and around the first release of quarterly accrual information. The results of the study provide empirical evidence of a positive association between the adverse selection component and accruals in the yearly analysis. Since wider bid-ask spreads are both theoretically and empirically linked to higher stock returns (Brennan & Subrahmanyam, 1996), our results provide a transaction cost basis for understanding one possible factor underlying the linkage between accruals and cost of equity capital, and accruals and information risk pricing as documented in Francis et al. (2005) and Ecker et al. (2006).     

Analysts’ sale and distribution of non fundamental information

We examine an analyst’s sale and distribution of information related to short-term price movements but unrelated to underlying firm value. By selling non fundamental information, the analyst increases competition on the signal, but prices become more sensitive to net order flow, creating an offsetting increase in the non fundamental signal’s value. More precise non fundamental information is more widely distributed. In the limit, a perfect non fundamental signal will be publicly disclosed for an arbitrarily small fee, and the analyst earns profits as if he possessed fundamental information. Consistent with empirical findings, analysts’ recommendations can be profitable, even when widely distributed or seemingly inconsistent with detailed forecasts. Analysis based on non fundamental information does not contribute to greater price efficiency but reduces liquidity costs. In a multi-period setting, traders with non fundamental information do not front-run, preferring to transact only in the period in which uninformed demand is executed.     

The information content of retail investors’ order flow

In this paper, we provide evidence that the trading activity of small retail investors carries significant genuine information that can be exploited for the short-term out-of-sample forecasting of foreign exchange rates. Our findings are based on a unique dataset of around 2000 retail investors from the OANDA FXTrade electronic trading platform. Our results are consistent with the view that in the foreign exchange market private information is highly dispersed, but can be extracted by observing customer order flow. Previous studies, however, focused on the information content of costumer order flow of dealers in the interbank market, whose clients are themselves large institutional and professional investors. Our study is the first that analyzes a crowd of small retail investors and shows that even the trading activity of these investors contains, on aggregate, important non-public information that can be exploited for short-term exchange rate forecasting. Our findings lead us to conjecture that retail investors (on aggregate) are not pure noise traders but process dispersed information at least partially in a similar way as large institutional investors and hence place their orders accordingly.     

Does better information about foreign shocks improve monetary policy?

This paper examines whether better information about foreign shocks leads to welfare-improving monetary policy using a stylised two-country New Keynesian general equilibrium model. We demonstrate that when terms of trade externality exist and national central banks have the incentives to shift terms of trade in their own favour, the equilibrium under imperfect information may be welfare superior relative to an equilibrium with perfect information. In addition, the welfare gains or losses from information sharing between central banks are found to be small for empirically plausible range of parameters for risk aversion and elasticity of labour supply.     

Does the accruals quality premium arise from information risk?

In this study, we examine whether the accruals quality premium arises from information risk through the following: (i) an investigation of the accruals quality (AQ) premium conditioned by market competition levels; (ii) a test of the impact of an exogenous shock on tax‐loss‐selling incentives; and (iii) an examination of the quality of specific accruals. Consistent with an information risk explanation, we find that the pricing effect of AQ is concentrated in firms with low market competition; that tax‐loss selling is unlikely to explain the observed AQ premium; and that specific accruals quality measures which are more likely to reflect information risk are priced.     

Aggregate insider trading: Contrarian beliefs or superior information?

We decompose realized market returns into expected return, unexpected cash-flow news and unexpected discount rate news to test the relation between aggregate market returns and aggregate insider trading. We find that (1) the predictive ability of aggregate insider trading is much stronger than what was reported in earlier studies, (2) aggregate insider trading is strongly related to unexpected cash-flow news, (3) market expectations do not cause insider trading contrary to what others have documented, and (4) aggregate insider trading in firms with high information uncertainty is more likely to be associated with contrarian investment strategy. These results strongly suggest that the predictive ability of aggregate insider trading is because of insider’s ability to predict future cash-flow news rather than from adopting a contrarian investment strategy. These results hold even after we control for non-informative trades and information uncertainty.     

Are executive stock option exercises driven by private information?

In this study, we investigate the extent to which exercise of executive stock options is based upon private information. Contrary to popular belief, we find that shares are held more than 30 days following over a quarter of options exercised. Partitioning the data, we find weak evidence that decisions to exercise and sell immediately are prompted by bad news and stronger evidence that decisions to exercise and hold for at least 30 days are prompted by good news. Enhancing the power of our tests by considering several factors important to exercise decisions, we find that the higher the opportunity costs of early exercise as measured by the time-value of options, the greater the trading profits to executives. We also find that the greater the disguise provided by incentives to diversify and consume as measured by the depth of options in the money, the greater the trading profits to executives who exercise and sell. Turning to non-exercise decisions, we find that a strategy of holding options rather than shares to exploit good news yields positive abnormal returns consistent with theoretical predictions in the absence of dividends.

Accounting information systems research: Is it another QWERTY?

This article examines the research within accounting information systems (AIS) as found in articles published in leading accounting, management information systems, and computer science journals from 1982 to 1998. Trend analysis is performed on AIS articles found in the following journals: The Journal of Information Systems; Advances in Accounting Information Systems; Journal of Accounting Research; The Accounting Review; Journal of Accounting and Economics, Accounting, Organizations and Society, Auditing: A Journal of Practice and Theory; Behavioral Research in Accounting; Journal of Management Accounting Research; Management Science; MIS Quarterly; Decision Sciences; Information Systems Research; and Communications of the ACM, among others. The trend analysis is structured across underlying theory, research method, and information systems lifecycle topics of AIS articles in these journals. This article identifies the extant research streams in AIS, where AIS research has been published from 1982 to 1998, and seeks to provide insight into the question: should AIS exist as its own separate research domain? Is AIS research like the QWERTY keyboard (David, 1985), widely adopted due to popular demand, but ineffective and inefficient, with a better AIS research and teaching model available?