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Measuring Information Asymmetry In Firms: Proxies And Market Frictions Essay.

8 Pages / 1,862 Words Published On: 08-09-2020

We use several sets of proxies to measure the degree of information asym- metry. We first consider proxies for firm maturity: firm size and age. As larger and older firms are typically better known, we expect them to face lower in- formation asymmetry (Frank and Goyal 2003; Lemmon and Zender 2010).

We also use two measures of the nature of a firm’s assets: asset tangibility and the market-to-book ratio. Tangible assets are likely to be easier for outside investors to value than either intangible assets or growth opportunities (Harris and Raviv 1991). The third set of proxies is related to measures of volatility: We include the volatility of both earnings and stock returns as measures of risk and information asymmetry (e.g., Brennan and Subrahmanyam 1996; O’Hara 2003). The fourth set covers attributes of analyst forecasts. We include the dispersion in analysts’ forecast as well as the accuracy of analysts’ fore- cast as proxies for the information gap between insiders and outside investors (Lang and Lundholm 1996). While the previous measures capture information asymmetry between managers and investors, some dividend theories focus on information asymmetry between informed and uninformed outside investors (e.g., Brennan and Thakor 1990). In addition to the above, we also use the number of analysts following each firm as a proxy for this type of information asymmetry (e.g., Babenko, Tserlukevich, and Vedrashko 2009).

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