Information Asymmetry Flashcards
(6 cards)
Definition of information asymmetry
When one party to a transaction has relevant information that the other parties do not.
In capital markets expectation is that directors/ management of the company possess more information than shareholders
Problems for capital markets
Efficient markets demand that all participants have the same information
Markets collapse if there is suspected information asymmetry
Outside investors unwilling to pay a reasonable price
Adverse selection
Types of announcements made by listed companies to meet FCA
Annual financial report - must make public atleast 4 months after the end of financial year- contain audited statements
Half year report - must make public after at least 3 months, condensed financial statements
Transactions by significant shareholders above 3% holding, must disclose increase or decrease of more than 1%
Transactions of managers/directors and connected parties in the shares of the entity inside information announcements e.g profit warning, financial difficulties, trading ahead etc
Inside information definition
Precise information that is not generally available and that a reasonable investor would use to help them make investment investment decisions. It’s also information that if generally available would be likely to effect the price of investment.
What inside information is relevant to an investors decision
1) assets and liabilities of issuer
2) performance of expectation of performance of issuers company
3) financial condition of issuer
4) course of issuers business
5) major new developments in the business of issuer
6) information previously disclosed to the market
Delay of inside information
An issuer may delay under its own responsibility if
1) such ommision would not likely mislead the public
2)any person receiving the information owed the issuer a duty of confidentiality
3) issuer is able to ensure the confidentiality of that information
