Information Asymmetry and Estimation Risk: Preliminary Evidence from Chinese Equity Markets

Abstract

This study discusses the implication of information asymmetry between firms and investors for the estimation risk of asset returns. We evaluate various risk measures of information asymmetry between firms and investors for China, an excellent example of a low information environment. We find a significant negative relationship between voluntary disclosure based on U.S. GAAP with certification of a credible audit firm and the variation of risk-adjusted returns. On the other hand, neither private information production nor certified voluntary disclosure is associated with any variation of asset returns in the primary markets.

Keywords: Information asymmetry, estimation risk, private information production, voluntary disclosure, auditor certification

JEL Classification: G12, G14, G38