The impact of corporate governance performance on the association between information asymmetry and opportunities' optimal levels: evidence from developed markets

Abstract

PurposePrevious literature posits that corporate governance and information asymmetry are the main factors in making efficient investments. Meanwhile, a growing body of studies is of the opinion that corporate governance can also mitigate the problem of information asymmetry and consequently exerts significant impacts on the association between information asymmetry and investment efficiency. This study aims to analyze the impact of corporate governance and information asymmetry on investment efficiency. It also tests the moderating role of corporate governance in the relationship between information asymmetry and investment efficiency.Design/methodology/approachThe sample consists of 4,082 firms domiciled in 20 developed countries over the years from 2003 to 2019, including 33,812 firm-year observations. The bid–ask spread is used as a proxy for information asymmetry. To measure corporate governance performance, a proxy provided by ASSET4 is employed, and to determine the optimal levels of investments, we relied on the growth opportunity. To estimate the models, ordinary least squares and generalized method of moment are used.FindingsThe results reveal that information asymmetry is inversely related to investment efficiency, and, corporate governance mitigates this negative association.Originality/valueThis paper sheds light on the role of corporate governance in firms as a lever for mitigating information asymmetry and tries out information asymmetry and agency theories in relation to the impact of information asymmetry on investment efficiency. It also confirms the theory stating that corporate governance can be considered as a determinant of investment efficiency.