Clarity Begins at Home: Internal Information Asymmetry and External Communication Quality
Posted: 24 Jun 2015 Last revised: 5 May 2017
Date Written: May 4, 2017
This paper investigates the effect of internal information asymmetry (hereafter 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.
Keywords: Internal information asymmetry, management forecasts, accounting restatements
JEL Classification: G1, G30, M40, M41, M44
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