Legal Protection, Corporate Governance and Information Asymmetry in Emerging Financial Markets

Abstract

This paper, using observations from firms in emerging financial markets (EFM), examines the association between proxies for legal protection, law enforcement and corporate governance on country level scores for information asymmetry (IA). In addition, the paper also examines the association between differences in financial development of EFM and IA. IA is measured using a method developed by Jacobson and Aaker (1993) who argued that stock market participants, being forward-looking, not only react to information about business performance but also attempt to anticipate outcomes that will only later be reflected in accounting information. The measure applied seeks to assess the degree to which investors have information that allows them to anticipate future accounting results versus the extent that they react to current-term accounting results. Regression results show that firms in countries with strong legal protection/law enforcement and corporate governance are associated with lower IA. Firms in countries with more developed markets are also associated with lower IA levels.

Keywords: Legal protection; Corporate governance; Information asymmetry; Emerging financial markets

JEL Classification: M41, D82, G34, G14