Large Shareholder Portfolio Diversification, Intra-Industry Connectedness, and Information Asymmetry and Moderation Effect of Competition and Board Independence

Information probably is the most crucial step in the decision-making process. Financial statements provide reliable and comparable information for investors and other decision-makers to help them make efficient decisions. However, when there is not an equal amount of information accessible to all decision-makers, there would be different decision outcomes regarding a particular subject, leading to inefficient decisions and dissatisfied participants. Hence, information distribution quality and information symmetry are as crucial as information quality and have been subject to many studies. Psychological and economic theories suggest that peoples have learning constraints, such that resources devoted to one task reduce the resources available for other tasks (Kahneman, 1973; Peng, 2005; Peng and Xiong, 2006). various studies provide empirical evidence that even professional market participants are subject to capacity constraints arising from limited time and attention (Chakrabarty and Moulton, 2012; Corwin and Coughenour, 2008; Harford et al., 2019; Schmidt, 2019). When shareholders spread their portfolio wealth among more firms, the weight of firms in the portfolio decrease, the benefit from gathering private information about a particular firm decreases, and shareholders considering resource constraints would have a great motivation to instead of gathering private information acquisition through close interactions with management, use public disclosure as a cost-effective alternative information channel to reduce uncertainty about portfolio firms (Peng 2005). hence, shareholders probably demand greater public information, and there would be more pressure on the managers to increase the amount and quality of public financial disclosure, which can lead to decreased information asymmetry. On the other hand, large shareholders with diversified portfolios probably have the power to access more industry-level information through ownership networks and political connections, which can lead to more information asymmetry. Considering the intra-industry information transfer phenomenon, intra-industry connectedness can greatly impact public information disclosure demand and manager behavior regarding financial information reporting (Sajjadi and Pourheidari, 2018). The intra-industry connectedness can incentivize managers to manage earnings, leading to poor financial reporting and information asymmetry. However, the positive aspect is that in highly connected industries, the information provided by the peer firms can be used for decision-making regarding the main firms and this extra information can decrease information asymmetry. This study evaluates the relationship between large shareholder portfolio diversification, intra-industry connectedness, information asymmetry, moderation effect of market competition, and board independence.

The present sample of the present study includes 150 companies listed on the Tehran Stock Exchange from 2016 to 2020. In order to test the research hypotheses, multiple regression analyses have been used. Based on theoretical foundations, these hypotheses were developed and tested:H1: There is an association between intra-industry connectedness and information asymmetry.H2: There is an association between large shareholder portfolio diversification and information asymmetry.H3: board independence moderates the relationship between intra-industry connectedness and information asymmetry.H4: Competition in the market moderates the relationship between intra-industry connectedness and information asymmetry.H5: Board independence moderates the relationship between large shareholder portfolio diversification and information asymmetry.H6: Competition in the market moderates the relationship between large shareholder portfolio diversification and information asymmetry.

The results show a positive and significant relationship between intra-industry connectedness and information asymmetry which is moderated negatively by competition in the market, the moderation effect of board independence was not significant in this relationship. On the other hand, there was a positive and significant relationship between large shareholder portfolio diversification and information asymmetry which is moderated positively by competition in the market and negatively by board independence.

The results of this study show that intra-industry connectedness positively affects the level of information asymmetry. It means that in highly connected industries, the destructive effect of manager behaviors is stronger than the constructive effect of the intra-industry information transfer phenomenon and there is more information asymmetry. However, competition in the market decreases this effect. On the other hand, firms that have large shareholders with a highly diversified portfolio are more likely to have information asymmetry problems. This information asymmetry can result from extra information these large shareholders can obtain through the cross-ownership in rival firms in the industry and industry-level undeclared information through political connections regarding government decisions about incentives and tariffs. Results show that having more independent members on the board of directors can decrease that relationship which probably results from more monitoring and control of information disclosure by managers. On the other hand, the positive moderation effect of competition in the market on the relationship between large shareholder portfolio diversification and information asymmetry was not unexpected. When there is high competition in the industry, information obtained by large shareholders through representatives in rival firm boards would be much more valuable and lead to greater information asymmetry. The findings should be considered in the decisions of policymakers, investors and stakeholders of the firms because they can provide information about information asymmetry risks. Auditors can also use this finding for risk assessment and planning.