The effects of firms’ information environment on analysts’ herding behavior

We find financial analysts herd to a greater degree in firms with more opaque information environments as measured by the incidence of short-term institutional investors present. The S-statistic, a measure of forecast bias, and forecast timing and quality metrics are used to measure analyst herding behavior. The results are consistent with the notion that opaque information environments are more conducive to analysts engaging in reputational herding behavior where more capable analysts act first and less capable analysts follow. Additionally, analysts are more likely to issue forecast revisions subsequent to management earnings guidance in less opaque environments. Robustness tests indicate our operational measure of opacity is not subsumed by other measures of the information environment, namely information asymmetry.     

The information superhighway

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

Literature review and challenging research agenda on politicians’ use of accounting information

Recent research on politicians’ use of financial and performance information is reviewed. Survey-based studies overestimate the frequency of this use; observational studies present a more accurate picture. A new and challenging research agenda is presented that will improve our understanding of the use and usefulness of accounting information. Implications for the real world of practice are discussed.     

Q method can identify diverse perspectives on ‘helpful’ information on cancer clusters and inform risk communication generally

Communication by state public health agencies about cancer clusters is complicated by divergent official and citizen beliefs about causation (e.g. chance versus environmental pollution). We use Q method, rarely applied in the risk field, to explore disparate perspectives on what people deem helpful and unhelpful in background (not site-specific) information about cancer clusters. Q method identified five unique perspectives, with low inter-factor correlations: Cancer Causation, Best Information, Cancer Frequency, Study Success, and Empathy/Competence. Besides discussing implications of these perspectives for improving communication about cancer clusters, we use this case to illustrate Q method’s more general ability to represent variability in attitudes about risk and risk information and to improve risk communication.     

The impact of audit firms’ characteristics on audit fees following information security breaches

Given the importance of auditors’ assessing business risks and evaluating internal controls, we investigate whether an audit firm’s industry expertise, tenure, and size can help its auditors better understand external and internal threats faced by the client with less effort. Using reported information security breach incidents from 2004 to 2013, we find that, consistent with prior studies, audit fees are higher after the occurrence of an information security breach. However, such an association is negatively moderated when the audit firm has industry-specific expertise, longer experience with the client, and is one of the Big 4 firms. Our results suggest that because of their better knowledge about a specific industry, increased familiarity with the client’s operations, and more resources to understand a client’s vulnerabilities and/or information security policies and procedures, these auditors are more capable of assessing the potentially changing information security risks implied by the occurrence of information security breach incidents. Our results are robust to a variety of sensitivity checks.     

Do option traders on value and growth stocks react differently to new information?

This study compares the changes in implied volatilities of options on Nasdaq 100 and Russell 2000 value and growth portfolios, for the time period of 2004 and 2005. Following the methodologies in Stein (J Finance 44:1011–1024, 1989) and Heynen et al. (J Financ Quant Anal 29:31–56, 1994), we attempt to infer whether there are systematic differences in the degree of overreactions between value and growth options. The empirical evidence indicates that the reactions to information by investors in growth options, as proxied by options on Nasdaq 100 and Russell 2000 growth, are stronger than those of Russell 2000 value. Whether these reactions can be considered as overreacting, however, is not entirely conclusive. Nevertheless, the results imply that difference in investors’ behavior and styles is one potential explanation for the value stock effect.     

Do hedge funds trade on private information? Evidence from syndicated lending and short-selling

This paper investigates an important contemporary issue relating to the involvement of hedge funds in the syndicated loan market. In particular, we investigate the potential conflicts of interest that arise when hedge funds make syndicated loans and take short positions in the equity of borrowing firms. We find evidence consistent with the short-selling of the equity of the hedge fund borrowers prior to public announcements of both loan originations and loan amendments. We also find that hedge funds are more likely to lend to highly leveraged, lower credit quality firms, where access to private information is potentially the most valuable and where trading on such information could lead to enhanced profits. Overall, our results have important implications for the current debate regarding regulating the hedge fund industry.     

The effect of cost information on buyer–supplier negotiations in different power settings

We investigate the influence of total cost of ownership (TCO) information on buyer–supplier negotiations in different power settings. Based on social exchange theory and recent literature on information processing, we expect that buyers with detailed TCO information and less power than their negotiation partners may try to (re)gain control over their own outcomes by sharing information. The results of our experiment indicate that the performance disadvantage of less powerful buyers is less pronounced when the buyer has detailed TCO information, whereas more powerful buyers do not seem to be able to profit from TCO information. These somewhat counterintuitive findings are explained through detailed analysis of the buyer’s negotiation behavior, which shows that less powerful buyers who have access to TCO data use problem solving techniques more frequently than powerful buyers, who tend to rely on distributive bargaining techniques instead. We conclude that power can motivate a failure to share TCO information, resulting in less effective interfirm negotiation outcomes.     

Extracting information or resource? The Hotelling rule revisited under asymmetric information

A concessionaire has private information on the initial stock of resource. A “virtual Hotelling rule” describes how the resource price evolves over time and how extraction costs are compounded with information costs along the optimal extraction path. Fields which are heterogeneous in terms of their initial stocks follow different extraction paths. Resource might be left unexploited in the long run as a way to foster incentives. The optimal contract may sometimes be implemented through royalties and license fees. With a market of concessionaires, asymmetric information leads to a “virtual Herfindahl principle” and to another form of heterogeneity across active concessionaires.     

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.     

The effects of risk‐taking tendency on risk choice and pre‐ and post‐decisional information selection

Ideally, people seek and select information about unfamiliar risks with which they are confronted, before they make a risk choice. This study investigated what happens when people do not have this opportunity. The main question was how risk‐taking tendency influences intuitive risk decisions and how this impacts subsequent information search and subsequent choices. In the present study, participants had to make a choice about an unfamiliar risk, either before or after they had had the opportunity to search for (risk‐promoting or risk‐averse) information. In the condition where they could only seek for information after they had made a choice, they had to reconsider their first choice and make a second risk choice. We expected that (1) risk‐taking tendency would impact people's risk choices, but only in the situation where they have little information. On the basis of cognitive dissonance theory, it was furthermore predicted that (2) risk‐taking tendency and (3) initial risk choice would affect risk information selection. Furthermore, we predicted that (4) the first risk choice and (5) the risk information selected would influence the subsequent risk choice. The results suggest that if people make a first, intuitive decision about an unknown risk, risk‐taking tendency has an effect on the choice, but that this does not happen when people can first select information. Risk‐taking tendency did not influence information selection, but initial choice did (although in another way than we expected). Furthermore, both the first risk choice and the risk information selected affected subsequent risk choices. These findings suggest that people often make initial intuitive decisions that are influenced by personality characteristics, and that are subsequently difficult to change.     

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.