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- Title
Clarity Begins at Home: Internal Information Asymmetry and External Communication Quality.
- Authors
Chen, Chen; Martin, Xiumin; Roychowdhury, Sugata; Wang, Xin; Billett, Matthew T.
- Abstract
This paper investigates the effect of internal information asymmetry (IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company's stock (DIFRET). Numerous validation tests indicate that DIFRET indeed captures the information asymmetry between divisional managers and top managers. In our primary tests, we find that DIFRET is associated negatively with the accuracy, bias, specificity, and frequency of management forecasts. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET. Our results, thus, suggest that external communication quality suffers when the information asymmetry between divisional managers and top managers is more severe.
- Subjects
INFORMATION asymmetry; CONGLOMERATE corporation management; BUSINESS communication; INDUSTRIAL management; BUSINESS forecasting; EXECUTIVES; FINANCIAL statements; CORPORATE profits; ECONOMICS
- Publication
Accounting Review, 2018, Vol 93, Issue 1, p71
- ISSN
0001-4826
- Publication type
Article
- DOI
10.2308/accr-51842