Information disclosure ratings and managerial short-termism: An empirical investigation of the Chinese stock market

Abstract

Information asymmetry between managers and outside investors creates agency problems and impedes efficient capital allocation. Information disclosure is critical in alleviating information asymmetry in capital markets. This study investigates the effect of information asymmetry on managerial short-termism by examining information disclosure ratings (IDRs). Using real earnings management as a proxy for managerial short-termism, our analysis of a sample of Chinese A-share companies during 2001-2018 indicates that high IDRs mitigate managerial short-termism. The results also indicate that the effect of IDRs in reducing managerial short-termism is driven mainly by stock liquidity. This conclusion holds after consideration of endogeneity and application of two-stage least-squares and generalized method of moments methods, adjustment of the definition of IDRs, consideration of alternative proxies for managerial short-termism, and control for firm characteristics that might affect the extent of managerial short-termism. This study also examines the effects within three subsamples: companies listed on the Shenzhen Stock Exchange main board, small and medium enterprise board, and growth enterprise market board. IDRs substantially reduce managerial short-termism among firms listed on all three boards. These findings indicate that enterprises have corrected previous internal governance problems, and IDRs have helped to improve internal governance through stock liquidity. Therefore, external supervision also helps to reduce the agency problem of managerial short-termism.

Does managerial short-termism always matter in a firm's corporate social responsibility performance? Evidence from China

“…In a less competitive environment, the information asymmetry problem is severe; therefore, managers can easily pursue private interests. It is documented that external supervision helps to reduce the agency problem of managerial short-termism [ 105 ]. Managerial overinvestment in CSR activities may not be detected in less-competitive industries because of the low comparability of their performance to that of other firms because there are no or few competing firms in the same industry.…”