Financial reporting opacity and informed trading by international institutional investors

Abstract

a b s t r a c tUsing cross-country data on trading by international mutual funds, I find that firms with more opaque information environments, as captured by firm-and country-level measures of the availability of financial reporting information, experience more privately informed trading by institutional investors. The association between firmlevel opacity and informed trading is most pronounced where country-level disclosure infrastructures are less developed and for those investors for whom the incentives and opportunities to acquire private information are greatest. A difference-in-differences analysis of the returns earned by institutions in opaque stocks suggests that this information advantage is economically significant.

The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research

“…[] find associations consistent with a direct path from earnings quality to the cost of equity, and an indirect path that is mediated by information asymmetry. Similarly, Lang, Lins, and Maffett [] use mediation analysis to illustrate that liquidity is an important mechanism through which disclosure increases firm valuation (Tobin's Q ) and also lowers the cost of capital. However, these studies do not establish causality for the mechanisms, which presents an opportunity for future research.…”

The role of corporate governance in foreign investments

“…Chen et al (2010) suggest that a firm with weak governance structure has greater incentive to engage in opportunistic behaviour and link governance problems to higher monitoring costs. Maffett (2012) demonstrates that corporate opacity leads to increase in private informed trading. One way by which investors can overcome these informational problems and monitoring costs is by investing in foreign firms that have better governance mechanisms.…”

Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market

“…Roll () points out that there is lower stock return synchronicity when informed traders capitalize on their private information through their trades. Therefore, R 2 should be decreasing in the level of transparency to the extent that there is a greater payoff to opportunistic informed trading when information formally revealed by companies to the public is less timely or forthcoming (Maffett, ; Aslan, Easley, Hvidkjaer, and O'Hara, ). In other words, lower R 2 could reflect greater information risk associated with increasing uncertainty about a firm's fundamentals due to lack of corporate transparency .…”