Information Asymmetry and the Bond Coupon Choice

2017 ◽  
Vol 93 (2) ◽  
pp. 37-59 ◽  
Author(s):  
Dan Amiram ◽  
Alon Kalay ◽  
Avner Kalay ◽  
N. Bugra Ozel
Keyword(s):  
Information Asymmetry ◽  
Regulation Fair Disclosure ◽  
Signaling Mechanism ◽  
Exogenous Shock ◽  
Analyst Coverage ◽  
Fair Disclosure ◽  
Efficient Contract ◽  
Prior Literature

ABSTRACT We examine the role of the coupon choice in bond contracts as a signaling mechanism in the presence of information asymmetry between borrowers and lenders about the credit quality of the borrower. Prior literature focuses on the use of maturity as a signaling mechanism. We conjecture that the coupon is a more effective signaling mechanism. We exploit the enactment of Regulation Fair Disclosure (RegFD) as an exogenous shock to the level of information asymmetry, and employ both bond- and equity market-based variables of information asymmetry to test our conjecture. We find that following the enactment of RegFD, the coupon rates of bonds issued by unrated firms increase relatively more than those of rated firms, consistent with the coupon choice addressing information asymmetry. We fail to find similar increases in maturity. Our inferences remain the same when using the probability of informed trade to measure relative changes in information asymmetry around the enactment of RegFD. We also draw similar conclusions utilizing exogenous drops in analyst coverage that result from brokerage house closures as an alternative quasi-natural experiment. Finally, we provide evidence that the coupon is used more extensively when issuance costs are higher, precisely when maturity is predicted to be a less efficient contract term with which to address information asymmetry. JEL Classifications: G10; G23; M21; M41.

scholarly journals Disclosure Frequency, Information Environment, and Cost of Capital under Regulation Fair Disclosure in the Korean Market

2020 ◽  
Vol 12 (14) ◽  
pp. 5856
Author(s):  
Hoshik Shim
Keyword(s):  
Emerging Markets ◽  
Information Asymmetry ◽  
Information Leakage ◽  
Equity Capital ◽  
Information Environment ◽  
Price Ratio ◽  
Corporate Disclosure ◽  
Regulation Fair Disclosure ◽  
Fair Disclosure ◽  
Korean Market

Disclosure policy contributes to improve sustainable corporate information environment by mitigating information asymmetry surrounding companies. Economic theories generally support that more disclosures reduce the level of information asymmetry, increase stock liquidity, and thus decrease the costs of equity capital. However, the effect of corporate disclosure in emerging markets is not clearly predictable because of the potential information leakage prior to disclosure. Considering this issue, this study focuses on the Regulation Fair Disclosure which prohibits selective disclosure. Using the earnings-to-price ratio as a proxy of the costs of equity, the study finds that disclosure frequency is negatively related to the cost of equity capital. However, I do not find evidence that disclosure is negatively related to the implied costs of equity capital (ICOE). The results of the quintile analysis suggest that this inconsistency is attributable to the better information environment of the ICOE sample. The findings of this study have implications for disclosure regulations in emerging markets, given that the existing literature casts doubt on the effectiveness of corporate disclosure in such markets.

scholarly journals Do Analysts Follow Managers Who Switch Companies? An Analysis of Relationships in the Capital Markets

2013 ◽  
Vol 89 (2) ◽  
pp. 451-482 ◽  
Author(s):  
Francois Brochet ◽  
Gregory S. Miller ◽  
Suraj Srinivasan
Keyword(s):  
Capital Markets ◽  
Data Availability ◽  
Professional Relationships ◽  
Matched Sample ◽  
Regulation Fair Disclosure ◽  
Analyst Coverage ◽  
Listed Firms ◽  
Fair Disclosure ◽  
Carry Over ◽  
Selective Disclosure

ABSTRACT We examine the importance of professional relationships developed between analysts and managers by investigating analyst coverage decisions in the context of CEO and CFO moves between publicly listed firms. We find that top executive moves from an origin firm to a destination firm trigger analysts following the origin firm to initiate coverage of the destination firm in 10 percent of our sample, which is significantly higher than in a matched sample. Analyst-manager “co-migration” is significantly stronger when both firms are within the same industry. Analysts who move with managers to the destination firm exhibit more intense and accurate coverage of the origin firm than they do in other firms and compared to other analysts covering the origin firm. The advantage no longer holds after the executive's departure, and most of the analysts' advantage does not carry over to the destination firm. However, the analysts do increase the overall market capitalization of firms in their coverage portfolio. Our results hold after Regulation Fair Disclosure, suggesting that these relationships are not based on selective disclosure. Overall, the evidence shows both the importance and limitations of professional relationships in capital markets. Data Availability: Data are publicly available from sources identified in the article.

scholarly journals Do Innovative Firms Communicate More? Evidence from the Relation between Patenting and Management Guidance

2020 ◽  
pp. 0000-0000
Author(s):  
Sterling Huang ◽  
Jeffrey Ng ◽  
Tharindra Ranasinghe ◽  
Mingyue Zhang
Keyword(s):  
Voluntary Disclosure ◽  
Regulation Fair Disclosure ◽  
Fair Disclosure ◽  
Information Demand ◽  
Disclosure Decisions ◽  
Management Guidance ◽  
Proprietary Cost ◽  
Role Of Information ◽  
Innovation Outcomes

Successful innovations could induce more disclosure if the information asymmetry between the firm and its investors about post-innovation outcomes leads investors to demand more information. However, such innovations also likely entail greater proprietary cost concerns, which deter disclosure. This paper uses patent grants to examine the effect of innovation success on management guidance behavior. We find that more management guidance follows patent grants, suggesting that despite disclosure cost concerns, firms with successful innovations do respond to information demand. This association is stronger after enactment of Regulation Fair Disclosure and for firms with greater institutional investor ownership, further highlighting the role of information demand. The association is weaker for firms with more competition, consistent with proprietary cost concerns having a moderating impact. Overall, our findings suggest that innovation creates demand for more voluntary disclosure and firms' disclosure decisions following innovation outcomes vary in ways that disclosure theory and economic intuition predict.

Does Tenure Matter: Role of the Corporate Secretary in Chinese-Listed Firms

2018 ◽  
Vol 33 (1) ◽  
pp. 181-205 ◽  
Author(s):  
Chen Wang ◽  
Qing Ye ◽  
Abhinav Goyal
Keyword(s):  
Board Meeting ◽  
Analyst Coverage ◽  
Listed Firms ◽  
Board Processes ◽  
Outside Director ◽  
Institutional Shareholders ◽  
The Impact ◽  
Variable Analysis

SYNOPSIS We study the impact of corporate secretary tenure on the governance quality of Chinese A-share listed firms. Results show that corporate secretary tenure is negatively associated with board meeting frequency, outside director in-meeting dissent, and incidence of fraud and lawsuit. Key findings are robust to an array of additional tests including propensity score matching, instrument variable analysis, as well as alternate governance measures such as analyst coverage, modified auditor opinion, number of institutional shareholders, and outside director board meeting absence. Overall, our study confirms the importance of corporate secretary in favor of modern corporate governance outcomes and board processes. JEL Classifications: G15; G30; K22; M41.

The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry

2004 ◽  
Vol 39 (2) ◽  
pp. 209-225 ◽  
Author(s):  
Venkat R. Eleswarapu ◽  
Rex Thompson ◽  
Kumar Venkataraman
Keyword(s):  
Information Asymmetry ◽  
Securities And Exchange Commission ◽  
Return Volatility ◽  
Trading Costs ◽  
Regulation Fair Disclosure ◽  
Fair Disclosure ◽  
Regulation Fd ◽  
Material Information ◽  
The Impact ◽  
Selective Disclosure

AbstractIn October 2000, the Securities and Exchange Commission (SEC) passed Regulation Fair Disclosure (FD) in an effort to reduce selective disclosure of material information by firms to analysts and other investment professionals. We find that the information asymmetry reflected in trading costs at earnings announcements has declined after Regulation FD, with the decrease more pronounced for smaller and less liquid stocks. Return volatility around mandatory announcements is also lower but overall information flow is unchanged when mandatory and voluntary announcements are combined. Thus, the SEC appears to have diminished the advantage of informed investors, without increasing volatility.

Does Regulation Fair Disclosure Reduce the Information Quality of Managerial Guidance?

2012 ◽  
Vol 47 (2) ◽  
pp. 273-297 ◽  
Author(s):  
Anna Agapova ◽  
Jeff Madura ◽  
Zhanel Mailibayeva
Keyword(s):  
Information Quality ◽  
Regulation Fair Disclosure ◽  
Fair Disclosure
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