Financial Development and Asymmetric Information

Abstract

We test the hypothesis that the degree of asymmetric information should decrease as financial systems develop, in a panel co-integration framework with annual data for 32 countries. To this end, we extend Barron et al.'s (1998) model to derive a measure of analysts' consensus that takes into account biases and herding in their forecasts. We calculate this measure, which is negatively related to asymmetric information, at the country level, with data from the I/B/E/S Global Aggregates database. In addition, we proxy financial development with the extensive set of indices found in the Word Bank's Financial Development and Structure database. Consistent with expectations, and despite the substantial differences across countries in terms of financial development and the quality of the institutional framework, the measure of analysts' consensus is positively related to indices proxying for the development of the financial system.

Keywords: Asymmetric Information, Analysts' Forecasts, Financial Development

JEL Classification: D82, G14, G20