Neoclassical theories in information economics model public information and private information as substitutes and find that earnings announcements reduce information asymmetry by reducing the informational advantage of informed traders. However, recent theoretical models find that earnings can increase information asymmetry by providing informed traders with an ability to better interpret the earnings announcement than uninformed traders. In a recent study, Ng, Verrecchia and Weber (2009) show that earnings that are not informative about underlying volatility increase information asymmetry. We use the financial crisis as an experimental setting which resulted in a shock to firms’ underlying volatility and examine whether earnings decrease information asymmetry by providing information about underlying volatility or whether they exacerbate information asymmetry by providing some traders with a better ability to interpret these announcements.
Financial reporting for banks has come under increased scrutiny during the recent financial crisis and has been subject to intense criticism. Motivated by concerns in the media and the regulators about the failure of accounting information to provide timely information about bank performance, we examine changes in information asymmetry around bank earnings announcements during the financial crisis period. Several factors have been argued to have aggravated the crisis, such as executive compensation schemes which encouraged bank managers to move into more opaque and risky transactions and the lack of relevant, reliable and understandable financial reporting information by firms (Rajan (2006), Ryan (2008), OECD Report (2009), Schwarcz (2009)). We investigate the role of exposure to sub-prime assets, equity-based managerial incentives, risk-management disclosure, bank size, loss recognition and fair value hierarchy information in alleviating or exacerbating information asymmetry around bank earnings announcements.
The role of entrepreneurship in society has changed drastically over the last half century. During the post-World War II era, the importance of entrepreneurship and small businesses seemed to be fading away. While alarm was expressed that small business needed to be preserved and protected for social and political reasons, few made the case on the grounds of economic efficiency.
The corporate form has consistently proven to be a superior method of business organization. Great industrial economies have grown and prospered where the corporate legal structure has been prevalent. This organizational form, however, has not existed and served without flaw. The multiple problems arising out of the fundamental agency nature of the corporate relationship have continually hindered its complete economic effectiveness. Where ownership and management are structurally separated, how does one assure effective operational efficiencies? Traditionally, the solution lay in the establishment of a powerful monitoring intermediary the board of directors, whose primary responsibility was management oversight and control for the benefit of the residual equity owners. To assure an effective agency, traditionally, the board was chosen by and comprised generally of the business’s largest shareholders. Substantial shareholdership acted to align board and shareholder interests to create the best incentive for effective oversight.
Additionally, legal fiduciary duties evolved to prevent director self dealing, through the medium of the duty of loyalty, and to discourage lax monitoring, through the duty of care. No direct compensation for board service was permitted. By the early 1930's, however, in the largest public corporations, the board was no longer essentially the dominion of the company’s most substantial shareholders.
