IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v59y2015i2p143-162.html
   My bibliography  Save this article

Information asymmetry and capital structure: Evidence from regulation FD

Author

Listed:
  • Petacchi, Reining

Abstract

This study uses Regulation Fair Disclosure (FD) as a plausibly exogenous shock to the information environment to identify the causal effect of information asymmetry on corporate financing behavior. Although Regulation FD prevents firms from selectively disclosing material information to market professionals in the equity market, firms can still do so to banks and rating agencies in the debt market. The standard׳s differential disclosure requirements lead to differential changes in the information environments between the two markets, providing a reasonably useful setting to examine the effect of information asymmetry on firms׳ capital structure. I find that firms with a high level of information asymmetry increase debt more than firms with a low level of information asymmetry post-Regulation FD. The results suggest that managers adjust the target leverage ratios to rely more on debt when facing higher costs of equity.

Suggested Citation

  • Petacchi, Reining, 2015. "Information asymmetry and capital structure: Evidence from regulation FD," Journal of Accounting and Economics, Elsevier, vol. 59(2), pages 143-162.
    • Handle: RePEc:eee:jaecon:v:59:y:2015:i:2:p:143-162
    DOI: 10.1016/j.jacceco.2015.01.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165410115000038
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jacceco.2015.01.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Skinner, Dj, 1994. "Why Firms Voluntarily Disclose Bad-News," Journal of Accounting Research, Wiley Blackwell, vol. 32(1), pages 38-60.
    2. Hasbrouck, Joel, 1991. "Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
    3. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
    4. Foster, F Douglas & Viswanathan, S, 1993. "Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March.
    5. Gomes, Armando & Gorton, Gary & Madureira, Leonardo, 2007. "SEC Regulation Fair Disclosure, information, and the cost of capital," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 300-334, June.
    6. Miguel A. Ferreira & Paul A. Laux, 2007. "Corporate Governance, Idiosyncratic Risk, and Information Flow," Journal of Finance, American Finance Association, vol. 62(2), pages 951-989, April.
    7. Easley, David & O'Hara, Maureen & Paperman, Joseph, 1998. "Financial analysts and information-based trade," Journal of Financial Markets, Elsevier, vol. 1(2), pages 175-201, August.
    8. Baljit Sidhu & Tom Smith & Robert E. Whaley & Richard H. Willis, 2008. "Regulation Fair Disclosure and the Cost of Adverse Selection," Journal of Accounting Research, Wiley Blackwell, vol. 46(3), pages 697-728, June.
    9. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    10. Sreedhar T. Bharath & Paolo Pasquariello & Guojun Wu, 2009. "Does Asymmetric Information Drive Capital Structure Decisions?," The Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 3211-3243, August.
    11. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    12. Duarte, Jefferson & Han, Xi & Harford, Jarrad & Young, Lance, 2008. "Information asymmetry, information dissemination and the effect of regulation FD on the cost of capital," Journal of Financial Economics, Elsevier, vol. 87(1), pages 24-44, January.
    13. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    14. James Jiambalvo & Shivaram Rajgopal & Mohan Venkatachalam, 2002. "Institutional Ownership and the Extent to which Stock Prices Reflect Future Earnings," Contemporary Accounting Research, John Wiley & Sons, vol. 19(1), pages 117-145, March.
    15. Anilowski, Carol & Feng, Mei & Skinner, Douglas J., 2007. "Does earnings guidance affect market returns? The nature and information content of aggregate earnings guidance," Journal of Accounting and Economics, Elsevier, vol. 44(1-2), pages 36-63, September.
    16. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
    17. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    18. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, August.
    19. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October.
    20. Bessembinder, Hendrik, 2003. "Trade Execution Costs and Market Quality after Decimalization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(4), pages 747-777, December.
    21. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(1), pages 1-24, March.
    22. Jorion, Philippe & Liu, Zhu & Shi, Charles, 2005. "Informational effects of regulation FD: evidence from rating agencies," Journal of Financial Economics, Elsevier, vol. 76(2), pages 309-330, May.
    23. Sugato Chakravarty & Bonnie F. Van Ness & Robert A. Van Ness, 2005. "The Effect of Decimalization on Trade Size and Adverse Selection Costs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5‐6), pages 1063-1081, June.
    24. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
    25. Duarte, Jefferson & Young, Lance, 2009. "Why is PIN priced?," Journal of Financial Economics, Elsevier, vol. 91(2), pages 119-138, February.
    26. Glosten, Lawrence R. & Harris, Lawrence E., 1988. "Estimating the components of the bid/ask spread," Journal of Financial Economics, Elsevier, vol. 21(1), pages 123-142, May.
    27. Bushee, Brian J. & Matsumoto, Dawn A. & Miller, Gregory S., 2003. "Open versus closed conference calls: the determinants and effects of broadening access to disclosure," Journal of Accounting and Economics, Elsevier, vol. 34(1-3), pages 149-180, January.
    28. Guillermo Llorente & Roni Michaely & Gideon Saar & Jiang Wang, 2002. "Dynamic Volume-Return Relation of Individual Stocks," The Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1005-1047.
    29. Eugene F. Fama, 2002. "Testing Trade-Off and Pecking Order Predictions About Dividends and Debt," The Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 1-33, March.
    30. Brown, Stephen & Hillegeist, Stephen A. & Lo, Kin, 2004. "Conference calls and information asymmetry," Journal of Accounting and Economics, Elsevier, vol. 37(3), pages 343-366, September.
    31. Gregory S. Miller, 2002. "Earnings Performance and Discretionary Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 173-204, March.
    32. Sarkissian, Sergei & Schill, Michael, 2010. "Why are U.S. firms listed in foreign markets worth more?," MPRA Paper 27543, University Library of Munich, Germany.
    33. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    34. Chuk, Elizabeth & Matsumoto, Dawn & Miller, Gregory S., 2013. "Assessing methods of identifying management forecasts: CIG vs. researcher collected," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 23-42.
    35. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    36. Sugato Chakravarty & Bonnie F. Van Ness & Robert A. Van Ness, 2005. "The Effect of Decimalization on Trade Size and Adverse Selection Costs," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 1063-1081.
    37. Altamuro, Jennifer & Beatty, Anne, 2010. "How does internal control regulation affect financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 58-74, February.
    38. Francis, J & Philbrick, D & Schipper, K, 1994. "Shareholder Litigation And Corporate Disclosures," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 137-164.
    39. Nemit Shroff & Amy X. Sun & Hal D. White & Weining Zhang, 2013. "Voluntary Disclosure and Information Asymmetry: Evidence from the 2005 Securities Offering Reform," Journal of Accounting Research, Wiley Blackwell, vol. 51(5), pages 1299-1345, December.
    40. Eleswarapu, Venkat R. & Thompson, Rex & Venkataraman, Kumar, 2004. "The Impact of Regulation Fair Disclosure: Trading Costs and Information Asymmetry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 209-225, June.
    41. Malcolm Baker & Jeffrey Wurgler, 2002. "Market Timing and Capital Structure," Journal of Finance, American Finance Association, vol. 57(1), pages 1-32, February.
    42. Beatty, Anne & Ramesh, K. & Weber, Joseph, 2002. "The importance of accounting changes in debt contracts: the cost of flexibility in covenant calculations," Journal of Accounting and Economics, Elsevier, vol. 33(2), pages 205-227, June.
    43. Easley, David, et al, 1996. "Liquidity, Information, and Infrequently Traded Stocks," Journal of Finance, American Finance Association, vol. 51(4), pages 1405-1436, September.
    44. Bessembinder, Hendrik, 1999. "Trade Execution Costs on NASDAQ and the NYSE: A Post-Reform Comparison," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(3), pages 387-407, September.
    45. Dierkens, Nathalie, 1991. "Information Asymmetry and Equity Issues," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 181-199, June.
    46. Robert E. Verrecchia & Joseph Weber, 2006. "Redacted Disclosure," Journal of Accounting Research, Wiley Blackwell, vol. 44(4), pages 791-814, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sualihu, Mohammed Aminu & Yawson, Alfred & Yusoff, Iliyas, 2021. "Do analysts’' forecast properties deter suboptimal labor investment decisions? Evidence from Regulation Fair Disclosure," Journal of Corporate Finance, Elsevier, vol. 69(C).
    2. Allayannis, George & Simko, Paul J., 2022. "Discretionary earnings smoothing, credit quality, and firm value," Journal of Banking & Finance, Elsevier, vol. 140(C).
    3. David Abad & Juan Pedro Sánchez-Ballesta & José Yagüe, 2017. "The short-term debt choice under asymmetric information," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 8(3), pages 261-285, August.
    4. Khalil Ullah Mohammad & Shin-Ichi Nishiyama, 2021. "Impact of Financial Sector Opacity on the Capital Structure Choice of Asian Banks," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 11(3), pages 219-235, March.
    5. Susan Albring & Monica Banyi & Dan Dhaliwal & Raynolde Pereira, 2016. "Does the Firm Information Environment Influence Financing Decisions? A Test Using Disclosure Regulation," Management Science, INFORMS, vol. 62(2), pages 456-478, February.
    6. Albring, Susan & Huang, Shawn & Pereira, Raynolde & Xu, Xiaolu, 2020. "Disclosure and liquidity management: Evidence from regulation fair disclosure," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    7. Tao Chen & Sidney Leung & Lingmin Xie, 2021. "Does credit rating conservatism matter for corporate tax avoidance?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(4), pages 5681-5730, December.
    8. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    9. Ripamonti, Alexandre, 2020. "Financial institutions, asymmetric information and capital structure adjustments," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 75-83.
    10. Kristian D. Allee & Brian J. Bushee & Tyler J. Kleppe & Andrew T. Pierce, 2022. "Did the Siebel Systems Case Limit the SEC's Ability to Enforce Regulation Fair Disclosure?," Journal of Accounting Research, Wiley Blackwell, vol. 60(4), pages 1235-1291, September.
    11. Poshakwale, Sunil & Aghanya, Daniel & Agarwal, Vineet, 2020. "The impact of regulations on compliance costs, risk-taking, and reporting quality of the EU banks," International Review of Financial Analysis, Elsevier, vol. 68(C).
    12. Allen H. Huang & Jianghua Shen & Amy Y. Zang, 2022. "The unintended benefit of the risk factor mandate of 2005," Review of Accounting Studies, Springer, vol. 27(4), pages 1319-1355, December.
    13. Chy, Mahfuz & Kyung, Hoyoun, 2023. "The effect of bond market transparency on bank loan contracting," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    14. Jonnergård, Karin & von Koch, Christopher & Nilsson, Ola, 2020. "Information environment – An exploration and clarification of the concept based on prior literature," Advances in accounting, Elsevier, vol. 50(C).
    15. Bai, Min & Li, Shihe & Xu, Limin & Yu, Chia-Feng (Jeffrey), 2022. "How do overconfident CEOs respond to regulation fair disclosure? Evidence from financial report readability," Finance Research Letters, Elsevier, vol. 50(C).
    16. Hossain, Ashrafee T. & Masum, Abdullah-Al & Xu, Jian, 2023. "COVID-19, a blessing in disguise for the Tech sector: Evidence from stock price crash risk," Research in International Business and Finance, Elsevier, vol. 65(C).
    17. Martin Bugeja & Meiting Lu & Yaowen Shan & Thomas To, 2021. "The probability of informed trading and mergers and acquisitions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 169-203, March.
    18. Tran, Ly Thi Hai, 2022. "Reporting quality and financial leverage: Are qualitative characteristics or earnings quality more important? Evidence from an emerging bank-based economy," Research in International Business and Finance, Elsevier, vol. 60(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    2. Lamoureux, Christopher G. & Wang, Qin, 2015. "Measuring private information in a specialist market," Journal of Empirical Finance, Elsevier, vol. 30(C), pages 92-119.
    3. Mamatzakis, Emmanuel & Zhang, Xiaoxiang & Wang, Chaoke, 2016. "Invisible hand discipline from informed trading: Does market discipline from trading affect bank capital structure?," MPRA Paper 76215, University Library of Munich, Germany.
    4. Susan Albring & Monica Banyi & Dan Dhaliwal & Raynolde Pereira, 2016. "Does the Firm Information Environment Influence Financing Decisions? A Test Using Disclosure Regulation," Management Science, INFORMS, vol. 62(2), pages 456-478, February.
    5. Lof, Matthijs & Bommel, Jos van, 2018. "Asymmetric information and the distribution of trading volume," Research Discussion Papers 1, Bank of Finland.
    6. repec:zbw:bofrdp:001 is not listed on IDEAS
    7. Michael J. Brennan & Sahn-Wook Huh & Avanidhar Subrahmanyam, 2016. "Asymmetric Effects of Informed Trading on the Cost of Equity Capital," Management Science, INFORMS, vol. 62(9), pages 2460-2480, September.
    8. Raman Kumar & Marius Popescu, 2014. "The implied intra-day probability of informed trading," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 357-371, February.
    9. repec:zbw:bofrdp:2018_001 is not listed on IDEAS
    10. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    11. Lof, Matthijs & van Bommel, Jos, 2023. "Asymmetric information and the distribution of trading volume," Journal of Corporate Finance, Elsevier, vol. 82(C).
    12. Duarte, Jefferson & Han, Xi & Harford, Jarrad & Young, Lance, 2008. "Information asymmetry, information dissemination and the effect of regulation FD on the cost of capital," Journal of Financial Economics, Elsevier, vol. 87(1), pages 24-44, January.
    13. Lipson, Marc L. & Mortal, Sandra, 2009. "Liquidity and capital structure," Journal of Financial Markets, Elsevier, vol. 12(4), pages 611-644, November.
    14. Marco Wölfle, 2015. "Information-Based Trade in German Real Estate and Equity Markets," Risks, MDPI, vol. 3(4), pages 1-26, December.
    15. Bardong, Florian & Bartram, Söhnke M. & Yadav, Pradeep K., 2005. "Informed Trading, Information Asymmetry and Pricing of Information Risk: Empirical Evidence from the NYSE," MPRA Paper 13586, University Library of Munich, Germany, revised 10 Oct 2008.
    16. Christian Leuz & Peter D. Wysocki, 2016. "The Economics of Disclosure and Financial Reporting Regulation: Evidence and Suggestions for Future Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 525-622, May.
    17. Shen, Carl Hsin-han, 2014. "Pecking order, access to public debt market, and information asymmetry," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 291-306.
    18. Sun, Yuxin & Ibikunle, Gbenga, 2017. "Informed trading and the price impact of block trades: A high frequency trading analysis," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 114-129.
    19. Martin Bugeja & Meiting Lu & Yaowen Shan & Thomas To, 2021. "The probability of informed trading and mergers and acquisitions," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 169-203, March.
    20. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017.
    21. Albuquerque, Rui & Song, Shiyun & Yao, Chen, 2017. "The Price Effects of Liquidity Shocks: A Study of SEC’s Tick-Size Experiment," CEPR Discussion Papers 12486, C.E.P.R. Discussion Papers.
    22. repec:uts:finphd:34 is not listed on IDEAS
    23. Harakeh, Mostafa, 2020. "Dividend policy and corporate investment under information shocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 65(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:59:y:2015:i:2:p:143-162. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.