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"asymmetric information"
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Blockchain Disruption and Smart Contracts
Blockchain technology provides decentralized consensus and potentially enlarges the contracting space through smart contracts. Meanwhile, generating decentralized consensus entails distributing information that necessarily alters the informational environment. We analyze how decentralization relates to consensus quality and how the quintessential features of blockchain remold the landscape of competition. Smart contracts can mitigate informational asymmetry and improve welfare and consumer surplus through enhanced entry and competition, yet distributing information during consensus generation may encourage greater collusion. In general, blockchains sustain market equilibria with a wider range of economic outcomes. We further discuss the implications for antitrust policies targeted at blockchain applications.
Journal Article
The Economics of Privacy
This article summarizes and draws connections among diverse streams of theoretical and empirical research on the economics of privacy. We focus on the economic value and consequences of protecting and disclosing personal information, and on consumers' understanding and decisions regarding the trade-offs associated with the pnvacy and the sharing of personal data. We highlight how the economic analysis of pnvacy evolved over time, as advancements in information technology raised increasingly nuanced and complex issues. We find and highlight three themes that connect diverse insights from the literature. First, characterizing a single unifying economic theory of privacy is hard, because pnvacy issues of economic relevance arise in widely diverse contexts. Second, there are theoretical and empirical situations where the protection of privacy can both enhance and detract from individual and societal welfare. Third, in digital economies, consumers' ability to make informed decisions about their privacy is severely hindered because consumers are often in a position of imperfect or asymmetric information regarding when their data is collected, for what purposes, and with what consequences. We conclude the article by highlighting some of the ongoing issues in the pnvacy debate of interest to economists.
Journal Article
Linguistic Complexity in Firm Disclosures: Obfuscation or Information?
Prior research generally interprets complex language in firms' disclosures as indicative of managerial obfuscation. However, complex language can also reflect the provision of complex information; for example, informative technical disclosure. As a consequence, linguistic complexity commingles two latent components—obfuscation and information—that are related to information asymmetry in opposite directions. We develop a novel empirical approach to estimate these two latent components within the context of quarterly earnings conference calls. We validate our estimates of these two latent components by examining their relation to information asymmetry. Consistent with our predictions, we find that our estimate of the information component is negatively associated with information asymmetry while our estimate of the obfuscation component is positively associated with information asymmetry. Our findings suggest that future research on linguistic complexity can construct more powerful tests by separately examining these two latent components of linguistic complexity.
Journal Article
ESG Disclosure and Idiosyncratic Risk in Initial Public Offerings
Although legitimacy theory provides strong arguments that environmental, social and governance (ESG) disclosure and performance can help mitigate firm-specific (idiosyncratic) risks, this relationship has been repeatedly challenged by conceptual arguments, such as ‘transparency fallacy’ or ‘impression management’, and mixed empirical evidence. Therefore, we investigate this relationship in the revelatory case of initial public offerings (IPOs), which represent the first sale of common stock to the wider public. IPOs are characterised by strong information asymmetry between firm insiders and society, while at the same time suffering from uncertainty in firm legitimacy, culminating in amplified financial risks for both issuers and investors in aftermarket trading. Using data from the United States, we demonstrate that (1) voluntary ESG disclosure reduces idiosyncratic volatility and downside tail risk and (2) higher ESG ratings have lower associated firm-specific volatility and downside tail risk during the first year of trading in the aftermarket. We provide theoretical arguments for the relationships observed, suggesting that companies striving for ESG performance and communicating their efforts signal their compliance with sustainability-related norms, thus acquiring and upholding a societal license to operate. ESG performance and disclosure help companies build their reputation capital with investors after going public. We also report that ESG disclosure is a more consistent proxy for ex-ante uncertainty as an indicator of aftermarket risk, thereby replacing some of the more conventional measures, such as firm age, offered in the existing literature.
Journal Article
Tax Aggressiveness and Corporate Transparency
We investigate whether aggressive tax planning firms have a less transparent information environment. Although tax planning provides expected tax savings, it can simultaneously increase the financial complexity of the organization. And to the extent that this greater financial complexity cannot be adequately clarified through communications with outside parties, such as investors and analysts, transparency problems can arise. Our investigation of the association between tax aggressiveness and information asymmetry, analysts' forecast errors, and earnings quality suggests that aggressive tax planning is associated with lower corporate transparency. We also find evidence that managers at tax-aggressive firms attempt to mitigate these transparency problems by increasing various tax-related disclosures. Overall, our results suggest that firms face a trade-off between tax benefits and financial transparency when choosing the aggressiveness of their tax planning.
Journal Article
Interorganizational dependence, information transparency in interorganizational information systems, and supply chain performance
To explain the large disparity between the potential and practice of interorganizational information systems (IOSs), this study investigates asymmetric information transparency in an IOS from a dyadic perspective. When there is asymmetric dependency in a dyad, an IOS may not completely eliminate asymmetric information transparency between supply chain (SC) partners but may change the nature of information asymmetry. Consistent with resource dependence theory, this study includes joint dependence and dependence asymmetry as antecedents of information transparency in an IOS. The data used in this study were collected from 111 matched pairs of intermediate component manufacturers and their immediate suppliers in heavy manufacturing industries. The results show that asymmetric information transparency in an IOS is prevalent in SC relationships. Regarding the antecedents of information transparency in an IOS, both joint dependence and each partner's dependence advantage are significant. Furthermore, information transparency in an IOS positively influences SC performance measured by SC relationship quality and relationship-specific performance, whereas asymmetric information transparency negatively influences joint profit performance.
Journal Article
Do Boards Take Environmental, Social, and Governance Issues Seriously? Evidence from Media Coverage and CEO Dismissals
This study empirically investigates the dismissal of U.S. CEOs following negative media coverage of environmental, social, and governance (ESG) practices. Extending related literature on the media, ESG, and CEO dismissal, I develop a theoretical framework that considers the media as an influential third party that forms and reflects public opinion about ESG issues. In this role, the media reduces information asymmetry by providing cues on their relative salience and prompting corporate directors to attribute firm-level ESG issues to the CEO, regardless of their involvement in the misconduct. Findings confirm this framework and particularly suggest that coverage of issues in prominent media sources is more likely to result in CEO dismissal. Further, companies that have made public commitments to ESG oversight and those with stronger monitoring are more likely to dismiss the CEO following negative coverage of ESG issues. Overall, this study builds an understanding of how contemporary boards approach the uncertain CEO dismissal decision amidst media coverage of ESG-related misconduct and reflects a shifting norm towards ESG integration at the board-level.
Journal Article
Observing Unobservables: Identifying Information Asymmetries With a Consumer Credit Field Experiment
Information asymmetries are important in theory but difficult to identify in practice. We estimate the presence and importance of hidden information and hidden action problems in a consumer credit market using a new field experiment methodology. We randomized 58,000 direct mail offers to former clients of a major South African lender along three dimensions: (i) an initial \"offer interest rate\" featured on a direct mail solicitation; (ii) a \"contract interest rate\" that was revealed only after a borrower agreed to the initial offer rate; and (ii) a dynamic repayment incentive that was also a surprise and extended preferential pricing on future loans to borrowers who remained in good standing. These three randomizations, combined with complete knowledge of the lender's information set, permit identification of specific types of private information problems. Our setup distinguishes hidden information effects from selection on the offer rate (via unobservable risk and anticipated effort), from hidden action effects (via moral hazard in effort) induced by actual contract terms. We find strong evidence of moral hazard and weaker evidence of hidden information problems. A rough estimate suggests that perhaps 13% to 21% of default is due to moral hazard. Asymmetric information thus may help explain the prevalence of credit constraints even in a market that specializes in financing high-risk borrowers.
Journal Article
THE EMPLOYMENT EFFECTS OF CREDIT MARKET DISRUPTIONS
This article investigates the effect of bank lending frictions on employment outcomes. I construct a new data set that combines information on banking relationships and employment at 2,000 nonfinancial firms during the 2008–9 crisis. The article first verifies empirically the importance of banking relationships, which imply a cost to borrowers who switch lenders. I then use the dispersion in lender health following the Lehman crisis as a source of exogenous variation in the availability of credit to borrowers. I find that credit matters. Firms that had precrisis relationships with less healthy lenders had a lower likelihood of obtaining a loan following the Lehman bankruptcy, paid a higher interest rate if they did borrow, and reduced employment by more compared to precrisis clients of healthier lenders. Consistent with frictions deriving from asymmetric information, the effects vary by firm type. Lender health has an economically and statistically significant effect on employment at small and medium firms, but the data cannot reject the hypothesis of no effect at the largest or most transparent firms. Abstracting from general equilibrium effects, I find that the withdrawal of credit accounts for between one-third and one-half of the employment decline at small and medium firms in the sample in the year following the Lehman bankruptcy.
Journal Article