The impact of corporate governance and political connections on information asymmetry: International evidence from banks in the Gulf Cooperation Council member countries

© 2019 Elsevier Inc. This study investigates the impact of corporate governance on the level of information asymmetry. In addition, the study examines whether a firm\u27s political connections have a moderating effect on this relationship. Based on a sample of leading listed local banks in the Gulf Cooperation Council (GCC) member countries, the findings indicate that proxies for corporate governance mechanisms are inversely related to proxies for information asymmetry. Specifically, greater board independence, blockholders, institutional ownership, and board size are associated with greater information asymmetry as reflected in share trading volume, market value of shares traded, and volatility of shares returns, whereas a Chief Executive Officer (CEO)’s also being on the Board of Directors is not significantly related to the level of information asymmetry. Moreover, removing insiders from the board may harm the company because outside directors lack the knowledge and experience to steer the company appropriately. Similarly, blockholders and institutional ownership both have a limited role in information dissemination in the GCC markets. Larger boards are ineffective in information dissemination because communication, coordination, and decision-making problems are greater. However, the interactions between the proxy for the firm\u27s political connections and corporate governance mechanisms are negatively related to the level of information asymmetry. The results indicate that firms with strong corporate governance and political connections may disseminate more information than firms that are politically unconnected. The results also imply that firm-level governance mechanisms and political connections in the GCC are crucial to improve the level of a firm\u27s transparency

Audit quality, political connections and information asymmetry: evidence from banks in gulf co-operation council countries

© 2020, Emerald Publishing Limited. Purpose: The purpose of this paper is to investigate the impact of audit quality on information asymmetry for a sample of leading listed local banks in the Gulf Cooperation Council (GCC). In addition, the paper examines whether a firm\u27s political connections moderate the association between audit quality and information asymmetry. Design/methodology/approach: The author employs country fixed effects to examine the impact of audit quality on information asymmetry. The paper uses a sample of 49 leading listed local banks across the GCC and 236 bank-year observations, over the period of 2012–2016. Findings: Using trading volume, trade value and stock return volatility as proxies for information asymmetry and audit quality through auditors\u27 opinion and audit size, the paper documents that audit quality plays an important role in improving the quality of financial information reporting by providing greater independent assurance of the credibility of financial reports. The paper also documents that a firm\u27s political connections have no effect on the association between audit quality and information asymmetry, indicating that the beneficial effects of audit quality are no greater for politically connected firms than for similar but politically unconnected firms. Practical implications: The findings of the study help policymakers, standard-setters and regulators to understand the potential adverse effect of political connections on the role of audit quality on information asymmetry. The study also provides important insights for audit regulators to better identify and understand the benefits of audit quality and to take policy matters that influence audit quality seriously. Originality/value: The study increases our understanding of the impact of audit quality on the level of information asymmetry in different economic, legal and political institutions, regulatory and litigation incentives and social contexts compared to that of research conducted using data collected from developed and other emerging countries. This will help to widen our knowledge on the role of audit quality on information asymmetry across the globe

Accounting for derivatives and risk management activities: The impact of product market competition

© Emerald Group Publishing Limited. Purpose - The lessons and merits of changes in the recognition and disclosure of derivative instruments and hedging activities are still debated and are a major policy issue. Prior studies provide mixed evidences on the economic consequences of mandatory derivative instruments\u27 recognition and disclosure. This paper aims to provide empirical evidence on the impact of mandatory derivative instruments\u27 recognition and disclosure on managers\u27 risk-management behavior. More importantly, this paper aims to investigate the role of product market competition on the impact of mandatory derivative instruments\u27 recognition and disclosure on managers\u27 risk-management behavior. Design/methodology/approach - This paper tests the author\u27s hypotheses using the fixed-effects estimation technique, where it includes firm dummies in all the regressions. This approach enables to control for unobserved firm effects (fixed effects) on firms\u27 risk-management behavior that are assumed to be constant through time but vary across firms. Findings - The author finds that mandatory recognition and disclosure of derivative instruments and hedging activities, on average, decreases firms\u27 market rate risk exposure. This finding suggests that after the implementation of the recognition and disclosure of derivative instruments and hedging activities required by Statement of Financial Accounting Standards No. 133 (SFAS 133), firms engage in more prudent risk-management activities to mitigate the potential cost of earnings volatility imposed by the standard. However, the decrease in market rate risk exposure is lower when the level of product market competition is higher. This finding is consistent with the idea that the recognition and disclosure of derivative instruments and hedging activities required by SFAS 133 unintentionally forces firms in competitive industries to engage in significant risk-taking. The result suggests that more disclosure in risk management may change risk-management incentives in undesirable ways if firms face the threat of entry in their product markets. Practical/implications - The results provide a new understanding on the role of product market competition on the effectiveness of mandatory derivative instruments\u27 recognition and disclosure. The findings imply that standard setters should take product market competition into consideration before making derivative instruments and hedging activities\u27 recognition and disclosure mandatory for all firms. Originality/value - The paper contributes to the accounting literature by providing a new insight into the moderating role of product market competition in the accounting recognition and disclosure regulation and firms\u27 reporting behavior relation. Moreover, the paper extends the current literature on the effects of SFAS 133 on risk-management activities and sheds light on the impact of accounting regulations on firms\u27 real economic behavior

Investors\u27 responses to macroeconomic news: the role of mandatory derivatives and hedging activities disclosure

Purpose: The purpose of this study is to investigate how changes in the firm\u27s information disclosure practices impact the way investors process macroeconomic news. Specifically, the authors examine the role of derivative instruments and hedging activities disclosure, as required by SFAS 133, in shaping invertors response to good and bad interest rate news. In addition, the authors examine whether the effect of SFAS 133 on investors\u27 response to good and bad interest rate news varies between firms with higher and lower earnings volatility. Design/methodology/approach: This study uses data on all US public firms over the period from 1990 to 2019. The authors mainly apply multivariate regression and a difference-in-difference approach to test their hypotheses. Findings: The results show a significant decrease in the asymmetry of responses to good and bad interest rate news for users of interest rate derivatives following the adoption of SFAS 133. However, in contrast to this finding, the authors also find that the adoption of SFAS 133 has no impact on the asymmetry of responses to good and bad interest rate news for nonusers of interest rate derivatives. Consistent with the ambiguity theory, the finding suggests that SFAS 133 indeed decreases investors’ uncertainty (ambiguity) about the cash flow implications of changes in the interest rate. The authors also find that the decrease in the asymmetry of response to good and bad interest rate news after the adoption of SFAS 133 is greater for users of interest rate derivatives with higher than lower earnings volatility. This implies that derivatives and hedging activities disclosure, as required by SFAS 133, are more important for firms with higher than lower earnings volatility. The finding is consistent with the idea that investors demand more accounting information when underlying earnings volatility is higher. In a set of additional analyses, the authors find that the effect of SFAS 133 on investors\u27 response to good and bad interest rate news varies depending on the level of analyst coverage and interest rate exposure. Specifically, the authors find that the decrease in the asymmetry of response to good and bad interest rate news after the adoption of SFAS 133 is greater for users of interest rate derivatives with higher interest rate exposure and lower analyst coverage. Practical implications: The findings of this study help market participants including regulators and standard setters to understand the impact of mandatory disclosure practices on investors\u27 reaction to macroeconomic news. Moreover, the findings of the study help managers to understand the influence firm-specific characteristics (e.g. earnings volatility, analyst coverage and interest rates exposure) on the effectiveness of mandatory derivative instruments and hedging activities disclosure. Originality/value: To the best of the authors\u27 knowledge, this is the first paper to explore how firm-specific information environment affects the way investors process macroeconomic news. This study contributes to the literature by providing the empirical evidence that derivatives instruments and hedging activities, as required by SFAS 133, affect investors\u27 response to good and bad interest rate news. In doing so, the results provide insights about how firm-specific information environment affects the way investors process macroeconomic news. This study shows that the cross-sectional variation in earnings volatility, analysts’ coverage and interest rate exposure affects the impact of SFAS 133 on investors\u27 response to good and bad interest rate news. The findings are not only the notable addition to the existing literature on the topic but also can aid to market participants including policy makers, regulators, standard setters and managers to understand the influence of firm-specific characteristics on the effectiveness of mandatory derivative instruments and hedging activities disclosure. Finally, the findings contribute to the general debate about the effectiveness of SFAS 133 by showing that the adoption of SFAS 133 indeed decreases information ambiguity

International financial reporting standards compliance and information asymmetries: The role of enforcement authority and audit quality

This paper aims to investigate whether firms operating in Gulf Co-operation Council (GCC) countries with International Financial Reporting Standards (IFRS) compliance enforcement authority vis-à-vis countries without IFRS compliance enforcement authorities exhibit cross-sectional differences in proxy for information asymmetries and market liquidity. In addition, the study examines whether firms operating in the GCC countries that require firms to be audited by two or more auditors vis-à-vis countries that do not require firms to be audited by two or more auditors exhibit cross-sectional differences in proxy for information asymmetries and market liquidity. Using trading volume as a measure of information asymmetries and market liquidity, I find that information asymmetriesare lower for firms operatingin countrieswith IFRS compliance enforcement authority than firms operating in countries without IFRS compliance enforcement authority. I also find that information asymmetries are lower for firms operating in countries that require firms to be audited by two or more auditors than for firms operating in countries that do not require firms to be audited by two or more auditors. The findings of this study suggest that the merit of IFRS is optimal if institutions such as enforcement authorities and auditors enforce adherence to IFRS and provide assurance that financial statements comply with IFRS.This study shed light on the fundamental accounting questions using samples drawn from firms located in countries in the GCC that are often ignored by accounting researchers. Thus, this study helps to widen our knowledge of accounting practices around the globe and understand the accounting and economic issues compared to samples drawn from developed and mature markets

The impact of Islamic Financial Services Board Standard No. 3 on corporate governance of listed firms in Kuwait

© 2017 Macmillan Publishers Ltd. This paper investigates whether corporate governance standard No. 3 that has been issued by Islamic Financial Services Board (IFSB-3) has improved corporate governance structure of firms listed in the Kuwait stock market. In addition, the paper investigates whether the influence of IFSB-3 on corporate governance varies between Islamic and conventional financial institutions. We test two hypotheses using a sample of firms listed in Kuwait stock exchange over a period of 2000-2013. Ordinary least square regression and fixed effects estimation techniques are applied to test the hypotheses. The findings reveal all corporate governance measures indicate that the corporate governance has improved after the issuance of IFSB-3. The results also reveal that the improvement in corporate governance after the implementation of IFSB-3 is higher for Islamic than for conventional financial institutions. This suggests that IFAB-3 is more important for Islamic than conventional institutions. Accordingly, we conclude that corporate governance guideline (IFAB-3) has improved the corporate governance structure of firms listed in the Kuwait stock market. In this context, the study increases the awareness of standard setters, academics, investors, regulators, and many other stakeholders about the effect of IFAB-3 in the region. Finally, our study fills evident gap in the literature by investigating the influence of corporate governance guideline (IFSB-3) on corporate governance structure in a unique setting that is often ignored by accounting scholars, which helps to widen our knowledge on accounting practices across the globe

Audit rotation, information asymmetry and the role of political connections: international evidence

Purpose: Audit rotation (AR) is a key policy initiative implemented in global jurisdictions to deal with concerns about audit quality. Auditing financial reports involves communicating attested value-relevant company information to investors, and hence audit quality plays a role in the quality of financial reporting information. This paper aims to investigate whether AR affects the degree of information asymmetry (IS) between investors. It further aims to examine whether voluntary AR results in less asymmetric information compared to mandatory AR. Additionally, it examines whether political connections moderate the association between AR and IS. Design/methodology/approach: The authors use data from publicly traded banks across the Gulf Cooperation Council (GCC) for the period 2010-2018. The authors include several variables to control for corporate governance and other firm-specific characteristics by using country-year fixed-effects regression model. Findings: The authors find higher IS for banks that periodically rotate auditor, while banks voluntarily choose to rotate auditors obtain high-quality audits, which results in higher trading volume and lower stock return volatility, hence lower IS. The results suggest that when banks voluntarily choose to rotate auditors, investors perceive these banks as more committed to obtaining high-quality audits relative to mandatory AR. Providing higher quality audits enhances the credibility of reported information and thus reduce the level of IS. Moreover, IS following AR is higher for politically connected banks than for similar but politically unconnected banks. Finally, investors perceive voluntary AR as a disciplining tool, which mitigates IS. This mitigating role is not affected by bank political connectedness. Research limitations/implications: This study has limitations as the definition of AR could be interpreted as binary or too narrow, and hence it may not be appropriate to generalize findings to different contexts. Nonetheless, this study casts light on a new perspective to reconcile the existing mixed evidence on the influence of AR on IS and the moderating role of political connections. A further limitation is that because of data unavailability, the authors were unable to use other proxies (e.g. bid-ask spreads and analyst forecast dispersion) of IS. Practical implications: The present findings provide insight to regulators, policymakers and standard setters on the potential adverse effect of political connections on the role of AR in mitigating IS. The results underscore the importance of voluntary AR, and suggest that regulators, policymakers and standard setters encourage firms to rotate their auditors periodically. Originality/value: This study provides evidence in a setting that is unique at the economic, social and regulatory levels. Prior literature is lacking and has been centered on developed countries or focusing on single-country specifications. The data set of this study is unique and allows us to examine the interplay between political influence that arises through ownership and management roles of influential members of state

Do Stock Market Fear And Economic Policy Uncertainty Co-Move With Covid-19 Fear? Evidence From The Us And Uk

Purpose - The purpose of the paper is to investigate co-movement of major implied volatility indices and economic policy uncertainty (EPU) indices with both the health-based fear index and market-based fear index of COVID-19 for the USA and the UK to help investors and portfolio managers in their informed investment decisions during times of infectious disease spread. Design/methodology/approach - This study uses wavelet coherence approach because it allows to observe lead-lag nonlinear relationship between two time-series variables and captures the heterogeneous perceptions of investors across time and frequency. The daily data used in this study about the USA and the UK covers major implied volatility indices, EPU, health-based fear index and market-based fear index of COVID-19 for both the first and second waves of COVID-19 pandemic over the period from March 3, 2020 to February 12, 2021. Findings - The results document a strong positive co-movement between implied volatility indices and two proxies of the COVID-19 fear. However, in all the cases, the infectious disease equity market volatility index (IDEMVI), the COVID-19 proxy, is more representative of the stock market and exhibits a stronger positive co-movement with volatility indicts than the COVID-19 fear index (C19FI). This study also finds that the UK\u27s implied volatility index weakly co-moves with the C19FI compared to the USA. The results show that EPU indices of both the USA and the UK exhibit a weak or no correlation with the C19FI. However, this study finds a significant and positive co-movemmit of EPU indices with IDEMVI over the short horizon and most of the sampling period with the leading effect of IDEMVI. This study\u27s robustness analysis using partial wavelet coherence provides further strengths to the findings. Research limitations/implications - The investment decisions and risk management of investors and portfolio managers in financial markets are affected by the new information on volatility and EPU. The findings provide insights to equity investors and portfolio managers to improve their risk management practices by incorporating how health-related risks such as COVID-19 pandemic can contribute to the market volatility and economic risks. The results are beneficial for long-term equity investors, as their investments are affected by contributing factors to the volatility in US and UK\u27s stock markets. Originality/value - This study adds following promising values to the existing literature. First, the results complement the existing literature (Rubbaniy et at, 2021c) in documenting that type of COVID-19 proxy matters in explaining the volatility (EPU) relationships in financial markets, where market perceived fear of COVID-19 is appeared to be more pronounced than health-based fear of COVID-19. Second, the use of wavelet coherence approach allows us to observe lead-lag relationship between the selected variables, which captures the heterogeneous perceptions of investors across time and frequency and have important insights for the investors and portfolio managers. Finally, this study uses the improved data of COVID-19, stock market volatility and EPU compared to the existing studies (Sharif et al, 2020), which are too early to capture the effects of exponential spread of COVID-19 in the USA and the UK after March 2020

The impact of Islamic accounting standards on information asymmetry: The case of Gulf Cooperation Council (GCC) member countries

© 2017, © Emerald Publishing Limited. Purpose: The purpose of this paper is to investigate whether disclosure as required by Islamic Financial Service Board Standard No. 4 (IFSB-4) influences information asymmetry among investors in the Gulf Cooperation Council (GCC) member countries. In addition, the paper investigates whether the influence of IFSB-4 on information asymmetry varies between Islamic and conventional financial institutions. Design/methodology/approach: The paper tests the hypotheses using a sample of firms listed in the GCC over a period of 2000-2013. Ordinary least square regression and fixed-effects estimation techniques are applied to test the hypotheses. Findings: The findings reveal that information asymmetry among investors is lower after the implementation of IFSB-4 than before, indicating that the standard has increased transparency. The results also reveal that information asymmetry after the implementation of IFSB-4 is lower for Islamic than for conventional financial institutions. This suggests that IFAB-4 promotes more transparency for Islamic than conventional institutions. Research limitations/implications: Owing to data availability, we were unable to use other proxies of information asymmetry, e.g. bid-ask spreads, and the level of disclosure, e.g. self-constructed disclosure index. Practical implications: The paper concludes that disclosures under IFAB-4 reduce information asymmetry among investors. In this context, this study increases the awareness of standard setters academics investors regulators and many other stakeholders about the economic consequences of disclosure standards in the region. Originality/value: This study takes a first step to fill evident gaps in the literature by investigating the influences of disclosure standard on information asymmetry in a unique setting that is often ignored by accounting researchers, which helps to widen our knowledge on accounting practices across the globe

Covid-19, Lockdowns And Herding Towards A Cryptocurrency Market-Specific Implied Volatility Index

This study investigates herd effects in 101 cryptocurrencies during the period from January 2015 to June 2020. Our results confirm the existence of herding behavior in the cryptocurrency market for the entire sample and show that herding asymmetry is present during both bullish and bearish regimes. The asymmetry in correlated trading is particularly visible in extreme return percentile regimes (1% and 5%) of cryptocurrency market Although our study finds no evidence of correlated trading when cryptocurrency specific fear prevails in the market, crypto investors seem to mimic the trading decisions of others during the COVID-19 pandemic, outside the lockdown periods. (C) 2021 Elsevier B.V. All rights reserved