Information asymmetry between firm managers and owners
Ruhland, Joseph Scott
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This dissertation examines two distinct issues involving information asymmetry. First, I examine whether or not insurance firms, as compared to other firms, are more difficult for outside investors to value. Second, I examine the impact of corporate governance mechanisms on the ability of outsiders to value the firm. Both essays employ a market microstructure based measure of information asymmetry. In the first essay, I examine the relative level of information asymmetry in the insurance industry compared to other industries. Several influential papers in the insurance literature rely on the argument that a great degree of information asymmetry exists in the insurance industry, yet no previous empirical work has tested this conjecture. I find evidence consistent with the argument that the property-liability insurance industry exhibits higher levels of information asymmetry than non-insurance industries. In the second essay, I explore the role of corporate governance structures in influencing levels of information asymmetry in publicly traded firms. Recent regulatory changes (i.e., Sarbanes-Oxley) have called for changes to create a “stronger” corporate governance structure. If one of the goals of such regulation is to make firms more informationally transparent, it is important to know whether differences in governance structures are associated with differences in levels of information asymmetry. Using a simultaneous equations system, I find evidence consistent with institutional ownership reducing levels of information asymmetry. In addition, I find evidence complementing recent work in the board determinants literature, namely that information asymmetry impacts board structure. Further, I find evidence suggesting that inside ownership and board independence may act as substitutes for one another in their monitoring role.