Clarity begins at home: Internal information asymmetry and external communication quality

Chen Chen, Xiumin Martin, Sugata Roychowdhury, Xin Wang, Matthew T. Billett

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)71-101
Number of pages31
JournalThe Accounting Review
Volume93
Issue number1
DOIs
Publication statusPublished - 1 Jan 2018

Keywords

  • External communication
  • Internal information asymmetry
  • Management forecast

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