Academic journal article Academy of Banking Studies Journal

Minimizing Information Asymmetry: Does Firm's Characteristics Matter?

Academic journal article Academy of Banking Studies Journal

Minimizing Information Asymmetry: Does Firm's Characteristics Matter?

Article excerpt

INTRODUCTION

Lending exposure constitutes the most material risk concentrations within banks, and granting of credit is a very important decision linking durable goods consumption spending and investment. It enables investors to generate profit-oriented economic activities that directly impact on the level of employment within an economy. Information asymmetry (i.e., information imperfection) in lender-borrower relationship can adversely affect the quality of credit decisions, and may result in high incidence of loan defaults.

This paper is a systematic literature review on information asymmetry in light of two perspectives: (1) A large firm is more efficient at minimizing information asymmetry and (2) A small firm is more efficient at minimizing information asymmetry. In particular, we are interested in the extent to which the size of a firm impacts information imperfection. We define "large firm" as publicly-traded equity firm with publicly available US Securities and Exchange Commission (SEC) filings; and "small firm" as small, private, unrated, growing, entrepreneurial corporations or Small Business Enterprises (SBEs).

The classification of an enterprise as a small business is not uniform across all countries. In the current review, we shall employ the US definition of a small business, which is a business that is "independently owned and operated and which is not dominant [italics added] in its field of operation" (Volpe & Schenck, 2008, p. 19). This definition may closely approximate that of other jurisdictions, given that the very name of "small business" must necessitate the absence of dominance and monopolies, where "only one firm, which is large [emphasis added] in size" (Duffy, 1993, p. 119) provides all of the market's supply. The US Congress developed a quantitative standard for classifying an SBE that is based on the number of employees of the enterprise and the average annual income generated by the firm. Table 1 provides an example of the numerical standards used by the US to classify an SBE within certain industries:

The purpose of this review is to evaluate the relative merit of those two perspectives with regard to minimizing information asymmetry in credit rationing decisions. Our method of review involved a systematic comparison of literature of the different proxy variables used to measure information asymmetry. Those proxy variables include but not limited to access to credit, firm size and information on stock offering, equity market valuation, size of borrower, and the Herfindhal index for measuring market concentrations.

This systematic literature review appears to be strikingly skewed in favor of large firms being more efficient at minimizing information asymmetry. The primary reason may be that stricter regulatory requirements, compliance, and firm-specific benefits compel large firms to make public disclosures of their financial position under the environment of generally accepted accounting principles. The resultant effect is efficiency at minimizing information asymmetry.

This review contributes to academic literature on firm size and correlation with information asymmetry. It is, to our knowledge, the first to document systematic difference between amount of information asymmetry and the size of a firm in light of the two perspectives. This fact is made evidenced by the limited and implicit literature on the subject, particularly with regards to small firms being more efficient at minimizing information asymmetry (perspective 2). This review will help institutional lenders to improve upon their lending policies by minimizing the problem of information asymmetry. But before we begin reviewing the systematic literature on the two perspectives, we briefly discuss information asymmetry and few related concepts.

WHAT IS INFORMATION ASYMMETRY?

The seminal work of Akerloff (1970), suggested that the premise of information asymmetry (i. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.