Accounting Accruals and Information Asymmetry in Europe

Abstract

Abstract:We investigate whether the positive relation between accounting accruals and information asymmetry documented for U.S. stock markets also holds for European markets, considered as a whole and at the country level. This research is relevant because this relation is likely to be affected by differences in accounting standards used by companies for financial reporting, in the traditional use of the banking system or capital markets for firm financing, in legal systems and cultural environment. We find that in European stock markets discretionary accruals are positively related with the Corwin and Schultz high-low spread estimator used as a proxy for information asymmetry. Our results suggest that the earnings management component of accruals outweighs the informational component, but the significance of the relation varies across countries. Further, such association tends to be stronger for firms with the highest levels of positive discretionary accruals. Consistent with the evidence provided by the authors, our results also suggest that the high-low spread estimator is more efficient than the closing bid-ask spread when analysing the impact of information quality on information asymmetry.

Corwin-Schultz Bid-ask Spread Estimator in the Brazilian Stock Market

“…Karstanje et al (2013) considered S_2 and S_0 as proxies for liquidity and did not find the robust predictive ability of liquidity for forecasting asset returns, which is neutral related to stationarity finding, exactly as in Zhang et al (2014). Cerqueira and Pereira (2014) show the association between the Corwin-Schultz measure and quality of financial reporting in Europe. Their findings strengthen the power of the Corwin-Schultz measure as an asymmetric information measure, but go against the stationarity finding because poor quality of financial reporting generates asymmetric information.…”

“…Zhang, Yang, Su, and Zhang (2014) tried to validate the Corwin and Schultz (2012a) method to predict the returns from 1926 to 2010 for the U.S. ordinary common stocks, and found the bid-ask measure lacking significantly as liquidity measure to predict returns. Cerqueira and Pereira (2014) provided evidence on the association between quality of financial reporting and information asymmetry in Europe, using discretionary accruals as a proxy for quality of financial reporting and the Corwin and Schultz (2012a) bid-ask spread estimator to measure information asymmetry, and found this measure more efficient than the closing bid-ask spread.…”

Are investors' desires for dividend increases stronger than dividend initiation

“…Investor's desire for dividends is the basis of the company in sharing dividends to increase firm value Baker and Wurgler (2004a). If investors have limited information, investors' desire for dividends is mainly formed based on information asymmetry, namely the imbalance of information between managers and investors (Cerqueira and Pereira, 2015;Zhang and Zheng, 2015;Jalilvand et al, 2018). Information limitations cause low transparency in the market, which associate low information quality and increase firm-specific return volatility to cause noise (Ivanova et al, 2017;Cerqueira and Pereira, 2018).…”

“…The supporting facts from previous research show that there is still a research gap. Wurgler (2004a, 2004b) and Li and Lie's (2006) research inspires the development of the dividend catering theory to get the answers that actually underlie the formation of investors' desire for dividends (Aslan et al, 2011;Cerqueira and Pereira, 2015;Zhang and Zheng, 2015;Mian and Sankaraguruswamy, 2012). There is an indication of the information gap between insiders (managers) and outsiders (investors) because of the information asymmetry.…”

“…This information asymmetry measurement is used to capture the adverse selection component on the spread. HLS is also applied by Cerqueira and Pereira (2015), who prove that the HLS estimator is more accurate in capturing the information asymmetry in the market compared to the relative bid-ask spread. HLS proves that intraday and daily data have similar performance in capturing the information asymmetry in the market.…”