The Information Asymmetry between Management and Rank-and-File Employees: Determinants and Consequences

53 Pages Posted: 18 Aug 2018 Last revised: 10 Jul 2019

See all articles by Kelly Huang

Kelly Huang

Florida International University

Meng Li

University of Texas at Dallas - Naveen Jindal School of Management

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: July 2019

Abstract

We investigate whether information possessed by rank-and-file employees is incorporated in top managers’ expectations and decisions. Using employees’ predictions of their company’s business outlook from Glassdoor.com to measure the employees’ information set, and using management earnings forecasts to measure management expectations, we show that management expectations incorporate employees’ information only partially. This intrafirm information asymmetry is lower when top managers are more experienced and internally engaged and when employees are more satisfied with senior management, firm culture, and their compensation; and higher in companies that are more decentralized, have internal control weakness, and poorly incentivize their employees. Further analyses suggest that our results are not driven by managers’ strategically choosing not to use employees’ information in their forecasts. Finally, we document that firms with large discrepancies between management forecasts and employee outlook have poorer future performance and a higher likelihood of CEO turnover.

Keywords: internal information asymmetry; rank-and-file employees; management earnings forecasts

JEL Classification: M41; M5

Suggested Citation

Huang, Kelly and Li, Meng and Markov, Stanimir, The Information Asymmetry between Management and Rank-and-File Employees: Determinants and Consequences (July 2019). AAA 2019 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=3233855 or http://dx.doi.org/10.2139/ssrn.3233855

Kelly Huang (Contact Author)

Florida International University ( email )

11200 SW 8th Street
Miami, FL 33199
United States

Meng Li

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W Campbell Road
Richardson, TX 75083-0688
United States
(972)883-2492 (Phone)

Stanimir Markov

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972 883 5166 (Phone)

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