Date of Award
8-21-2013
Degree Type
Thesis
Degree Name
Master of Philosophy (MPHIL)
Department
Finance and Insurance
First Advisor
Prof. Michael FIRTH
Second Advisor
Dr. Karen ZHANG
Abstract
The adverse selection and agency cost theories suggest that the informational transparency of a firm can help to reduce over- or under-investment. This thesis examines how information asymmetry influences firm-level investment efficiency for companies listed in the U.S. market from 1993 to 2009. Information asymmetry is measured by the dispersion and error of the earnings forecasts made by financial analysts. I investigate how information asymmetry affects firms’ proneness to overor under-invest and the firms’ deviations from the investment levels predicted by investment opportunities. To be consistent with the prior literature, I also use the volatility of daily stock returns and yearly high-low price spreads derived from daily stock trading as alternative proxies of information asymmetry. The results show that lower information asymmetry is associated with more efficient investment. Specifically, a good information environment reduces capital investment for firms that are more prone to over-invest and increases capital investment for those that are more prone to under-invest. In addition, lower information asymmetry is also negatively associated with firm investment when the firm is over-investing and is positively associated with firm investment when the firm is under-investing The results are robust across different regression methodologies and to different estimates of the variables. My findings are consistent with the agency theories of adverse selection and principal-agent conflict.
Copyright
The copyright of this thesis is owned by its author. Any reproduction, adaptation, distribution or dissemination of this thesis without express authorization is strictly prohibited.
Recommended Citation
Xie, L. (2013). How does asymmetric information relate to investment efficiency? Evidence from analysts' earnings forecasts and daily stock trading (Master's thesis, Lingnan University, Hong Kong). Retrieved from http://dx.doi.org/10.14793/fin_etd.6