Chen and Wang - Assymetric and Diversified 2010 PDF

Asia Pacific Management Review 17(1) (2012) 37-58
www.apmr.management.ncku.edu.tw
International Evidence on Industrial Diversification and Asymmetric

Information across Different Ownership Structures
Li-Ling Chena,, Andrew Ming-Long Wang b
a
Department of Accountancy, National Cheng Kung University, Taiwan;
Department of International Marketing, Ta-tung Institute of Commerce and Technology, Taiwan
b
Department of Accountancy and Graduate Institute of Finance and Banking, National Cheng Kung University,
Taiwan
Received 17 September 2009; Received in revised form 27 July 2010; Accepted 1 November 2010
Abstract
This paper examines the effect of industrial diversification on asymmetric information

based on global samples. We use the international data from 28 countries in America, Europe
and Asia during the period between 2000 and 2006 to test how corporate diversification
affects the degree of asymmetric information across different ownership structures. The
empirical results show that diversification will raise information asymmetry. In general, the
increase of ownership of managing owners raises the levels of asymmetric information, but
the marginal effect varies across the ownership structure.
For the marginal effect of diversification, the level of asymmetric information is
significantly higher for the diversified firms when the ownership of managing owners is
lower than a certain level (10% or 30%). This suggests that there are more entrenchment
effects for diversified firms. In contrast, the level of asymmetric information is significantly
lower for the diversified firms when the ownership is more than a certain level (30%). In this
case, there are alignment effects.
Keywords: Entrenchment effect, alignment effect, corporate ownership structure, corporate

diversification, asymmetric information
1. Introduction
The focus of this paper is to re-examine how corporate diversification affects the degree
of asymmetric information across different ownership structures. Due to the heterogeneity in
ownership structure across firms, the impact of corporate diversification on the degree of
asymmetric information is likely to vary across firms. Previous studies focused only on either
one country or region, thus, the validity of their empirical findings cannot be applied globally.
In this study, in addition to controlling the firm’s ownership structure by grouping, we further
extend the samples to 28 global countries.
Previous studies have conflicting arguments concerning the relationship between
corporate diversification and information asymmetry. Some studies (Subrahmanyam, 1991;
Gorton and Pennacchi, 1993; Thomas, 2002) suggest that the performance from segments of
a diversified firm is imperfectly correlated. This implies that asymmetric information
regarding each segment’s performance may be diversified away across segments, and is
termed the information diversification hypothesis. However, other studies argue that

Corresponding author. Email: judychen@ms2.ttc.edu.tw
37
L.-L. Chen, M.-L. Wang / Asia Pacific Management Review 17(1) (2012) 37-58
corporate diversification raises the flow of information and the complexity of the information.
This tends to lower corporate transparency and increase information asymmetry. This is
termed the transparency hypothesis (see Nanda and Narayanan, 1999; Habib, Johnsen, and
Naik, 1997; Krishnaswami and Subramaniam, 1999). In addition to corporate diversification
affecting information asymmetry, prior studies find that managerial equity ownership can
affect the level of diversification (Denis, Denis, and Sarin, 1997; Hoskisson, Johnson,
Tinhanyi, and White, 2005). Therefore, we consider that the ownership structure may affect
the direction of diversification on asymmetric information due to managers’ private benefits.
Ownership structures may affect the qualities of financial reporting and the flow of
information to the public (Zhao and Millet-Reyes, 2007; Jensen and Meckling, 1992). In
addition, they may further induce different levels of asymmetric information. When the
managing owners (manager) have highly concentrated ownerships, they will have an
incentive to produce high-quality earnings information due to increasing alignment of
interests between the managing owners and the minority shareholders (Gomes, 2000).
However, firms with proprietary knowledge will try to prevent the flow of information to the
public and competitors. Additionally, they tend to have highly concentrated ownership
structures to lower the cost of transferring information (Jensen and Meckling, 1992). The
information effect argument suggests that highly concentrated ownership is associated with
low accounting earning informativeness. As these two effects have an opposite impact upon
the level of asymmetric information, the relationship between ownership concentration and
asymmetric information needs to be examined further.
When the managing owners own a lower ownership stake, they can extract wealth from
the corporation while only bearing a minor fraction of the cost (Morck et al., 1988; Fan and
Wang, 2002). The entrenchment effect of the ownership structure may affect the quality of
financial reporting; therefore, it may create asymmetric information between the managing
owners and the public. In summary, the ownership structures of managing owners can
produce an alignment, information, or entrenchment effect. This will be an important factor
in determining the level of asymmetric information. The ownership structure plays an
important role in corporate diversification strategy, and it also has a critical effect on
asymmetric information. Therefore, the effects of the interaction of ownership structures and
corporate diversification on asymmetric information are worth investigating.
The underlying argument in this study states that the effect of diversification on
information asymmetry varies across ownership structures. Our findings support the
argument which states that diversification and ownership structure will raise information
asymmetry; however, the marginal effect will vary across the ownership structure. When
considering the marginal effect of diversification on asymmetric information across different
ownership structures, except for the result of abnormal returns around earnings
announcements measuring the degree of information asymmetry, the level of asymmetric
information is significantly higher for the diversified firms when the ownership of managing
owners is lower than a certain level (10% or 30%). This suggests that there are more
entrenchment problems for diversified firms. The level of asymmetric information is
significantly lower for the diversified firms when the ownership is more than a certain level
(30%). In result, there are alignment effects. The findings in this paper have important
implications for the corporation’s extended strategy and the corporation’s development
direction.
Few studies have addressed the fundamental question of how the diversification-
information asymmetry linkage varies across ownership structures. Diversification is an
essential business strategy for firms pursuing growth opportunities or expansion into other
industrial groups (Rumelt, 1982; Shelton, 1988; Freund, Trahan, and Vasudevan, 2007). It is
also a crucial risk management process for reducing cash flow volatility (Mansi and Reeb,
38
2002; Lamont and Polk, 2001). Asymmetric information is one of the most important
corporate governance issues. We hope that the empirical findings from this study can benefit
conglomerates that pursue growth strategy or risk management through diversification. We
also hope to provide capital markets with a more thorough understanding of the nature of
asymmetric information.
The remainder of this paper is organized as follows: section two develops the research
hypotheses; section three describes the samples and designs the research; section four
presents the empirical results of regression analyses; and conclusions and suggestions follow
in section five.
2. Hypotheses development
Diversification strategy results in several problems regarding corporate governance. One

of the major issues is asymmetric information between insiders and outsiders (Amihud and
Lev, 1981; Hyland and Diltz, 2002). Once a company with several segments induces complex
information and a large information flow, the soft and hard information regarding segments
may not be credibly communicated to outsiders; hence, there is asymmetric information
between insiders and outsiders. In result, diversification may exacerbate the asymmetric
information about each segment’s profitability and operating efficiency.
Previous studies examining the effect of diversification on asymmetric information
focused on the U.S., U.K. or other particular regions, instead of on a popular view. Therefore,
those findings cannot be regarded as a more general phenomenon. In order to solve the
problem of content validity, this paper intends to re-examine this argument from a global
view. Accordingly, we developed the first research hypothesis as follows:
H1: Corporate diversification is positively related to the level of asymmetric information
for global sample.
The ownership structure can affect the corporate diversification strategy and the level of
asymmetric information. Prior research shows that firms can reduce information asymmetry
by increasing the disclosure of financial reports (Healy and Palepu, 2001; Verrecchia, 2001).
However, the degree of ownership concentration can affect the disclosure of a financial report
on quality and quantity. Bhat, Hope, and Kang (2006) consider that the governance structure
can affect the credibility of financial information. Fan and Wong (2002) argue that
concentrated ownership is associated with low earnings informativeness. Our concern is
whether or not the relationships between asymmetric information and corporate
diversification vary across different corporate ownership structures.
If managers’ ownership can effectively control a given corporation (called controlling
owner or managing owner), they can entrench other stockholder interests through the pursuit
of objectives that are not profit-maximizing in return for private benefits. This may occur
when ownership falls below a certain level. This is due to the fact that managers only pay part
of the cost, but enjoy full interest. Fan and Wong call this the entrenchment effect. In contrast
to the entrenchment effect is the alignment effect. When ownership rises above a certain level,
the controlling owner may unexpectedly extract high levels of private benefits. This is done
because it will cost more for private gain. In this case, there is an alignment of interests
between the controlling owner and the minority shareholders; hence, the alignment effect. It
is interesting to note the situations where the entrenchment effect, alignment effect, or both
effects come into play.
Prior studies research the link between ownership structure and asymmetric information,
and also between corporate diversification and asymmetric information. However, very few
studies examine the effect of corporate diversification on asymmetric information across
ownership structure. Accordingly, we develop the second research hypothesis as follows:
39
H2: The marginal effect of corporate diversification on asymmetric information varies

across ownership structure; hence, it is a nonlinear relationship.
3. Sample selection and empirical design
The initial samples of the financial analysts forecast data, such as analysts forecast error
and dispersion, are drawn from I/B/E/S. Being limited by financial capability, we could only
obtain the data from year 2000 to year 2006. In addition, the data from 2006 is incomplete.
The individual stock return, segment data, and other financial reported data are drawn from
Worldscope and Datastream. All the firms contained in Worldscope and Datastream from
2000 to 2006 are then matched to the firms covered in I/B/E/S.
For data comparability and results validity, we place some restrictions on the samples.
The firms we sampled were required to have at least three analysts’ forecasts. The firms with
regulated utilities (SIC codes 4800-4829 and 4910-4949) and financial services operations
(SIC codes 6000~6999) segments are subject to regulations, and are excluded. For
consistency between the numbers of pre-spilt and post-spilt, we adjust the actual EPS and
forecast EPS to pre-split numbers.
Industry is identified based on three-digit Standard Industrial Classification (SIC) codes.
The first two digits of the SIC code denote the major industry group. The next digit (Three-
digit SIC codes) defines the industry grouping more narrowly. The four-digit SIC codes
denote the line of business (primary product). We are interested in cross-industrial
diversification. In addition, a variety of literature (Thomas, 2002; Hadlock, Ryngaert, and
Thomas, 2001) is based on three-digit SIC codes for distinct segments; therefore, the 3-digit
SIC code is adopted. The firms that operate in one business are defined as focused firms, and
firms with more than one business are defined as diversified firms.
Due to the differences in the respective corporative ownership structure, we divide global
samples into three categories. The first group consists of low concentrated ownership where
closely held shares are less than 10%. The second group consists of medium concentrated
ownership structure where closely held shares are between 10% and 30%. The third group
consists of high concentrated ownership where closely held shares are more than 30%.
Closely held shares are drawn from Worldscope and Datastream, and are composed of yearly
data. These shares represent the proportion of equity owned by corporate officers, directors,
and immediate family members; by individual shareholder holdings representing more than
5%; by other corporations (except shares held in a fiduciary capacity by financial institutions);
and by pension/benefit plans and trusts.
Table 1 provides the characters and distribution of the samples. Panel A discloses the
distribution of the country. The results in the samples of 7,670 firm-year observations contain
28 countries: America (65%), Asia (20%), and Europe (15%). There are 4,341 (57%) Single-
industry and 3,329 (43%) multi-industry observation firm-years. The proportion of Single-
industry is higher than the proportion of Multi-industry. A prime sample is the United States
that the proportion of Single-industry (69%) is far higher than the proportion of Multi-
industry (31%). This may be a result of corporations focusing on core lines of business to
improve their competition caused by the integration of global product markets over time.
Panel B of Table 1 disclosures the distribution of year across three ownership groups. It
shows that the proportion of Multi-industry to Total (Mult%) for low concentrated ownership
decreased year by year (from 52% to 21%), and this may be due to the entrenchment effect.
The proportion of Multi-industry to the Total for medium concentrated ownership and high
concentrated ownership illustrate an increasing trend. This may be due to the alignment effect.
40
Table 1. Distribution of sample.

Panel A：Distribution of country
Nation Multi-industry Single-industry Total
Asia:
China 26 29 55
Hong Kong 119 57 176
India 57 60 117
Indonesia 24 2 26
Israel 4 0 4
Japan 693 105 798
Korea 15 0 15
Malaysia 42 82 124
Philippines 9 3 12
Singapore 88 42 130
Taiwan 3 24 27
Thailand 15 48 63
Turkey 1 2 3
Subtotal 1,096 454 1,550
71% 29% 20%
Europe:
Greece 3 0 3
Hungary 2 2 4
Ireland 36 2 38
Italy 25 4 29
Netherlands 64 46 110
Norway 25 14 39
Poland 9 0 9
Portugal 1 2 3
Spain 12 4 16
Sweden 72 38 110
Switzerland 90 42 132
United Kingdom 359 320 679
Subtotal 698 474 1,172
60% 40% 15%
America:
Canada 6 14 20
Mexico 1 0 1
United States 1,528 3,399 4,927
Subtotal 1,535 3,413 4,948
31% 69% 65%
Total 3,329 4,341 7,670
41
Note:
1. The percentage of Multi-industry represents the percentage of Region/Groups
Multiple segment to Region/Groups Total, same principle for the percentage of
Single-industry.
2. The percentage of Total represents the percentage of Region/Groups total to total
sample.
Panel B：Distribution of Year

Low concentrated Medium concentrated High concentrated ownership
Total
ownership (0-10%) ownership (10%-30%) (30%-100%)
multi single Mult% multi single Mult% multi single Mult%
2000 101 92 52 72 104 41 68 133 34 570
2001 130 155 46 109 178 38 132 196 40 900
2002 147 155 49 165 257 39 204 235 46 1,163
2003 153 209 42 229 281 45 234 272 46 1,378
2004 153 232 40 287 336 46 206 307 40 1,521
2005 162 257 39 306 422 42 249 332 43 1,728
2006 11 41 21 124 77 62 87 70 55 410
Total 857 1,141 43 1,292 1,655 44 1,180 1,545 43 7,670
3.1 Diversification measure

We adopted an asset-based Herfindahl index by industry as the measure of diversification.
Thomas’s (2002) calculated the Herfindahl index as the sum of the squares of each reported
industrial segment’s assets as a proportion of the firm’s total assets. The higher the index is,
the lower the level of corporate diversification will be. It is clearer if we convert the
Thomas’s Herfindahl index to HERF. Here, it is calculated as one minus the Thomas’s
Herfindahl index. The higher the HERF is, the higher the level of corporate diversification
will be. HERF equals zero for all single-segment firms, and is larger than zero for multiple-
segment firms. However, it cannot be more than one even in extreme multiple-industry firms.
Higher levels of HERF correspond to less concentration of assets among segments; hence, we
are able to note greater diversification.
3.2 Asymmetric Information measure
We use the accuracy of consensus analyst forecasts (ERROR), the dispersion among
analyst forecasts (DISPERSION), absolute average abnormal returns (AR) for a three-day
window centered on annual earnings announcement dates, and the adverse-selection
component of bid-ask spread as proxies for information asymmetry. ERROR is the absolute
difference of the actual EPS and median forecast EPS. This represents the information gap
between the manager and the outsider of a firm. DISPERSION is the standard deviation
among analysts’ forecasts, and it explains the disagreement among the financial analysts.
Disagreement is caused by the unavailability of information regarding a firm. Thus, these are
used to measure the degree of information asymmetry. To control the effect of stock price
scale, both ERROR and DISPERSION are deflated by the stock price five days before the
earnings announcement date. To minimize the optimism bias of the forecast made at the
42
beginning of a fiscal year (O’Brien, 1988), forecast EPS is defined as the median of the
forecasts made by the financial analysts one month before the announcement.
Dierkens (1991) claimed that a strong market reaction to a firm’s earning announcement
is an indication that the firm managers released substantial private information. The
difference between a firm’s earning announcement result and the market expectation is called
the “surprise”. Therefore, the surprise can be used as a proxy to measure the level of
asymmetric information. Since the absolute magnitude of the stock price reaction is our
primary concern in this study, the absolute abnormal return is used as the third measure of
asymmetric information.
We take two steps to estimate the abnormal return. The first step is to estimate the market
model parameters using both daily returns of a sample firm’s stocks and market indices from
days -210 to -11. Here, day 0 is the earnings announcement date. The second step is to apply
the event study methodology to estimate the absolute value of equal weighted abnormal
return (|AR|) for three-day windows centered on the announcement date. This step measures
the level of private information release.
The fourth measure of asymmetric information is the adverse-selection component of the
bid-ask spread. The bid-ask spread set by market makers (dealer) is one of the transaction
costs faced by investors. The bid price is the dealer’s buy price for a security, and ask price is
the dealer’s sell price. The difference between these two prices is called the spread
representing the dealer’s profit and risk. The dealer’s risk contains two components:
Illiquidity (inventory cost component) and information asymmetry (adverse selection
component). Many researchers find that the quoted spread contains a statistically significant
adverse selection component (Stoll, 1989; George, Kaul, and Nimalendran, 1991). The larger
the level of asymmetric information is, and the larger the spread will be. We use the
methodology in George et al. (1991) to compute the adverse selection component of bid-ask
spread. In this study, two methods are used to estimate the spread. We adopt the first method
due to the fact that the history of bid/ask quotes is no longer available for a large number of
stocks.
First, we estimate the Roll (1984) quoted spread where there is no adverse selection in the
securities markets. The Roll (1984) quoted spread (Si) is measured by the serial covariance of
transaction returns and can be written as:
S i  2 *  Cov( RiTt , RiTt 1 )
Second, we regress the daily return of an individual security on the expected daily return
of the portfolio. It can be written as:
RiTt   01   1i E pt   it
,
Where RiTt is the continuously compounded daily transaction return of security i in the
period t, Ept is the expected daily return of an equal-weighted size-based portfolio as the
following: E pt   p   p * E pt 1   pt . Then, we use the disturbance return(ηit) to estimate the
spread (S1i) as the following:
S1i  2 *  Cov( it , it 1 )
The adverse-selection component (ASC) for each stock is estimated as follows:

ASC i  S1i  S i
43
To ensure that we have an unbroken series of continuously compounded returns available

for each security in each sub-period, we only retain securities where transaction prices are
available for every transaction day within a particular sub-period.
3.3 ownership structure
The ownership structure in the East and the West differ characteristically. In general,
corporate ownership in the U.S. and U.K. is more diffused, but commonly, it is highly
concentrated in East Asia (Fan and Wong, 2002; Fauver, Houston, and Naranjo, 2004).
Corporations have a highly concentrated level of ownership structure even in other developed
and developing countries (La Porta, Lopez-de-Silanes, Shleifer, and Vishny, 1998; Fauver et
al., 2004). Even through diffused ownership as in America, there are many firms with a
highly concentrated ownership structure. In view of the above, we cannot group global
samples by the features of a country’s ownership structure. Instead, we may group the
samples according to the ownership of a corporation.
It is difficult to collect ownership percentages for each of the firms by year across
countries. Similar to Fernandes and Ferreira (2008), we use the closely held shares
(ownership) drawn from Datastream and Worldscope as the proxy of firm ownership
structure (managing ownership). Similar to Morck et al. (1988) and Fauver, Houston, and
Naranjo (2003), we consider that the relation between ownership structure and asymmetric
information is nonlinear. The marginal impact of increased ownership concentration across
different ownership structure varies. Therefore, it is appropriate to apply the piecewise
regression. We create three separate ownership structure variables as follows:
own 0 _ 10  total ownership , if total ownership  10 %,

 10 %, if total ownership  10 %；
own10 _ 30  0, if total ownership  10 %,
 total ownership min us 10 %, if 10 %  total ownership  30 %,
 20 %, if total ownership  30 %；
own30  0, if total ownership  30 %,
 total ownership min us 30 %, if total ownership  30 %.
In addition, the impact of ownership concentration on the asymmetric information of

corporate diversification is our interest. Therefore, the interaction of ownership concentration
variables with diversification measure (HERF) is added in the regression.
3.4 control variables
Since the firm size is expected to affect the forecast accuracy and dispersion, we include
the firm size in the regression as the control variable. The firm size is defined as the natural
log of book value of total assets Ln (TA), or the natural log of market value of equity Ln
(MV).
The number of analysts’ forecasts will affect the level of outstanding information flow.
Brennan and Subrahmanyam (1995) used analysts following (ANALYST) as a proxy for the
supply of information about a firm. We expect that more analyst forecasts will decrease the
information gap. Therefore, the asymmetric information problems will be lower.
It is more difficult for financial analysts to forecast firms with a large amount of growth
opportunities than firms without growth potential. R&D and intangible assets are major
contributors to information asymmetry caused by growth potential (Aboody and Lev, 2000).
The ratio of R&D expenses to Sales (RDSALES), and the natural log of one plus ratio of
44
intangible assets to total assets at the previous fiscal year-end (INATA) are included in the
regression as the control variable.
Financial leverage can increase the volatility of earnings. A firm with a higher financial
leverage will have larger analyst forecast errors and dispersions; therefore, the ratio of long-
term debt and debt in current liabilities to total assets (LEVG) is included in the effect of
earning volatility.
It is a reasonable conjecture that the variation in the frequencies of information arrivals
drives the volatility of stock prices (Ross, 1989; Alford and Berger, 1999). Therefore, firms
with higher stock volatility are expected to have larger analyst forecast errors and dispersions.
The volatility of stock return (VOLATILITY) is calculated as the standard deviation of
market model residuals over the period of 210~11 days prior to the earnings announcement
date. This is used to measure the daily amount of information flow of a firm that arrives to
the market.
3.5 Empirical model
Cross-sectional multiple regressions will be used to test the relationship between firm
diversification and asymmetric information. First, we take regressions for the full sample (H1
hypothesis), instead of grouping. The model is as follows:
The level of Asymmetric Information   0  1 HERF   2 ownership
  3 (the number of analysts' forecast)   4 ( firm' s size)   5 ( firm' s future growth)
  6 (the level of debt)   7 (volatility of stock return)                (1)
We add ERROR and DISPERSION variables into regression when |AR| or ASC are
measured as a proxy for asymmetric information. In these models, a firm’s size measure is
used as the nature log of market value of the firm (Ln (MV)). The firm’s future growth is
measured by the nature log of ratio of market-to-book value (Ln (MB)), and volatility of
stock return is excluded in these two models.
Second, we test the marginal effect of diversification on asymmetric information across
different ownership structures (H2 hypothesis); therefore, the interaction of ownership
concentration variables with diversification measure (HERF) is added in the model (2). This
model includes the control variables for |AR| and ASC regression, and is similar to model (1):
The level of Asymmetric Information   1  1 HERF   2 own0 _ 10   3 own10 _ 30
  4 own30   5 own0 _ 10 * HERF   6 own10 _ 30 * HERF   7 own30 * HERF
  8 (the number of analysts' forecast)  9 ( firm' s size)  10 ( firm' s future growth)
 11 (the level of debt )  12 (volatility of stock return)                (2)
4. Empirical Results
4.1 Descriptive statistics

Table 2-1 provides the descriptive statistics for the key variables across corporate
ownership structure. In Table 2-1, in addition to |AR| and VOLATILITY, the other variables
nearly have significant differences across ownership structure groups. In addition to the
difference between group 1 and group 2, the difference between group 1 and group 3, and the
difference between group 2 and group 3 are nearly significant. This means that the characters
of three ownership structure types are in contrast. Therefore, we separate samples into three
classifications. In addition to the |AR|, the mean levels of asymmetric information increase as
45
the levels of ownership increase. It seems to point out that there is a positive relationship
between asymmetric information and concentrated ownership.
Table 2-1. Descriptive Statistics of Variables.
Group (1)owner (2)owner (3)owner
variables 0%~10% 10%~30% 30%~100% (1-2)a (1-3)a (2-3)a
ERROR 0.72% 1.14% 1.81% -0.43%*** -1.09%*** -0.67%***
DISPERSION 0.36% 0.55% 0.97% -0.19%** -0.61%*** -0.42%***
|AR| 1.63% 1.68% 1.58% -0.05% 0.05% 0.10%*
ASC 8.95% 12.88% 18.65% -3.93%*** -9.70%*** -5.78%***
HERF 0.1892 0.1861 0.1664 0.0031 0.0229*** 0.0198***
ownership 2.57% 19.07% 50.57% -16.50%*** -48.00%*** -31.49%***
ANALYST 10.61 8.83 7.67 1.78*** 2.94*** 1.17***
Ln(TA) 14.41 13.95 13.42 0.46*** 0.99*** 0.53***
RDSALES 0.07 0.07 0.09 0.00 -0.02*** -0.02***
LEVG 0.22 0.22 0.21 0.00 0.01** 0.01*
INATA 0.02 0.02 0.02 0.00 0.00*** 0.00***
VOLATILITY 2.55% 2.61% 2.64% -0.06% -0.10%** -0.04%
Ln(MB) 0.95 0.82 0.75 0.13*** 0.20*** 0.07***
Ln(MV) 5.31 4.76 4.15 0.54*** 1.16*** 0.61***
Note:
a
applied T test to test the differences of mean for firms grouped by firm’s ownership.
***; **; and * denote significance at the 0.01, 0.05, and 0.10 level, respectively.
Table 2-2 provides the correlations of the variables. In Table 2-2, in addition to |AR|, we
can see that the measures of asymmetric information (ERROR, DISPERSION, and ASC)
have positive relationships with diversification (HERF). The relationship between |AR| and
HERF is negative, and the relationships are revealed at the following results of regression. In
addition to the correlation between Ln(TA) and Ln(MV), other correlation of variables are
less than 80%. This implies there is not a collinear problem. However, the correlation
between ANALYST and the two measures of size are more than 50%. This implies that there
is partial substitute between the number of analysts and the firm’s size.
46

Table 2-2. Correlations of the variables.
L.-L. Chen, M.-L Wang / Asia Pacific Management Review 17(1) (2012) 37-58
ERROR Dispersion |AR| ASC HERF owner ANALYST Ln(TA) RDSALES LEVG INATA Volatility Ln(MB) Ln(MV)
ERROR 1 0.32 0.02 0.07 0.07 0.13 -0.07 -0.04 0.01 0.08 -0.06 0.10 -0.12 -0.13
Dispersion 1 0.02 0.03 0.02 0.07 -0.04 -0.02 0.03 0.09 -0.03 0.08 -0.11 -0.09
|AR| 1 0.02 -0.14 0.00 -0.05 -0.19 -0.05 -0.07 -0.06 0.30 0.04 -0.15
ASC 1 0.07 0.08 0.01 0.02 -0.05 0.02 0.00 0.07 -0.02 -0.01
HERF 1 -0.05 0.05 0.36 -0.04 0.12 0.21 -0.24 -0.09 0.26
owner 1 -0.18 -0.25 0.07 -0.04 -0.14 0.03 -0.11 -0.30
ANALYST 1 0.54 0.00 -0.03 0.09 -0.13 0.19 0.64
47
Ln(TA) 1 -0.01 0.30 0.35 -0.37 -0.08 0.86

RDSALES 1 0.07 -0.02 -0.06 -0.03 -0.04
LEVG 1 0.20 -0.06 -0.06 0.07
INATA 1 -0.18 -0.02 0.28
Volatility 1 0.07 -0.32
Ln(MB) 1 0.32
Ln(MV) 1

4.2 Regressions for full sample

Table 3. The regressions’ results for full sample.
ERROR / DISPERSION   0  1 HERF   2 ownership   3 ANALYST   4 Ln(TA)
  5 RDSALES   6 LEVG   7 INATA   8VOLATILITY             A, B
| AR | / ASC   0  1 HERF   2 ownership   3 ERROR  4 DISPERSION
  5 ANALYST   6 Ln( MV )   7 LEVG   8 Ln( MB)               C , D
A B C D
ERROR DISPERSION |AR| ASC
Intercept -0.0165*** -0.0051*** Intercept 0.0223*** 0.2393***
(-3.15) (-2.91) (17.13) (6.50)
***
HERF 0.0084 0.0021*** HERF -0.0043*** 0.1142***
(4.63) (3.48) (-4.57) (4.15)
ownership 0.0125*** 0.0035*** ownership -0.0040*** 0.1567***
(6.24) (5.22) (-3.65) (4.99)
ANALYST -0.0003*** -0.0002*** ERROR 0.0072*** 0.3466***
(-3.61) (-5.90) (4.23) (6.88)
Ln(TA) 0.0011*** 0.0003*** DISPERSION 0.0042 -0.0954
(2.88) (2.80) (0.68) (-0.53)
RDSALES -0.0004 -0.0002 ANALYST 0.0001*** 0.0026*
(-0.18) (-0.32) (2.68) (1.91)
***
LEVG 0.0149 0.0072*** Ln(MV) -0.0022*** -0.0049
(6.46) (9.30) (-10.32) (-0.82)
***
INATA -0.1966 -0.0985*** LEVG -0.0050*** 0.1135***
(-4.06) (-6.12) (-3.96) (3.10)
***
VOLATILITY 0.4340 0.1725*** Ln(MB) 0.0020*** 0.0037
(11.85) (14.17) (6.42) (0.42)
Adjusted R2 0.12 0.15 Adjusted R2 0.06 0.07
F Value 44.02 59.81 F Value 20.40 23.14
N 7,670 7,683 N 7,280 7,318
Note:
The regressions also include dummy variables for years 2000 - 2006 and dummy variables for
countries or regions. The estimated coefficients for the year, country, or regions dummies are not
reported. T-Statistics are in parentheses.
Table 3 is the regressions’ results for the full sample (model (1)). In regression A, we
adopt ERROR as a proxy of asymmetric information. HERF has a significantly positive
relation with ERROR, implying that diversification will reduce forecast accuracy and
increase asymmetric information. We are able to note the existence of the transparency
hypothesis.
Ownership has a significantly positive relation with ERROR. This indicates that
concentrated ownership increases the level of asymmetric information. We are able to note
the existence of the entrenchment effect or information effect. In alternate control variables,
ANALYST has a significantly negative relation with ERROR, and this agrees with our
expectation. This indicates that analyst can reduce asymmetric information by filling in the
gap of information. Ln (TA) has a positive relation with ERROR. This implies that the large
48
firm can decrease the accuracy of analysts’ forecasts. The possible reason may be that the
flow of information for a large firm is high and the character of information for a large firm is
complex. R&D investment has a more uncertain future outcome than intangible assets on
general accounting concepts; therefore, the relation between RDSALES and ERROR is
insignificant, and the relation between INATA and ERROR is significantly negative. LEVG
and VOLATILITY both have a positive relation with ERROR that is consistent with our
expectation. This means that the higher the LEVG and VOLATILITY are, the smaller the
analysts’ forecast accuracy will be. Finally, we use the fixed effect model to control the
heterogeneity of years and areas. Here, the F Value of regression is significant (44.02), and
there is no endogeneity.
Regression B adopts DISPERSION as a proxy of asymmetric information. The results are
similar to regression A where HERF has a significantly positive relation with DISPERSION.
This implies that diversification increases asymmetric information. The relations between
DISPERSION and other control variables, and the testing result of fixed effect are similar to
regression A. In regression C, we adopt |AR| as a proxy of asymmetric information. The
results of regression C are nearly completely different from regression A and B due to the
negative correlation between |AR| and HERF. This is seen in Table 2-2. HERF has a
significantly negative relation with absolute abnormal returns around earnings
announcements. This means that abnormal returns around earnings announcements for
focused firms are larger than diversified firms. The information flows around earnings
announcements are smaller for diversified firms. In other words, focused firms have higher
asymmetric information around earnings announcements. This is consistent with Dierkens
(1991) and Thomas (2002). Comment and Jarrell (1995) claim that diversification induces
volatility significantly reduces (the volatility effect). Hadlock et al. (2001) show that
volatility is a noisy measure of asymmetric information, and the firms with highly volatile
stocks have more severe asymmetric information problems proxy for abnormal return. These
effects may interactively induce the negative relationship between the level of diversification
and asymmetric information problems proxy for an absolute abnormal return. The relations
between |AR| and other control variables are nearly opposite to the results of ERROR and
DISPERSION, as well. Regression D adopts adverse-selection component (ASC) as a proxy
of asymmetric information. The results are similar to regression A and B. HERF has a
significantly positive relation with ASC. This implies that diversification increases the
adverse-selection component. The testing result of the fixed effect is similar to regression A
and B.
4.3 Regressions across ownership structure
4.3.1 The regressions’ results of forecast accuracy
Table 4 is the regressions’ results for forecast accuracy across ownership structure. The
coefficient of HERF is significantly positive in m1, not containing the interaction of HERF
and ownership. This means that the diversification increases asymmetric information. This is
consistent with Table 3. For both low and medium level of ownership concentration, there is
a positive link between ownership concentration and asymmetric information in m1. This
means that concentrated ownership decreases forecast accuracy when ownership
concentration is less than 30%. The relation between ownership concentration and
asymmetric information is positive but insignificant for ownership concentration beyond 30%.
In general, the increase of ownership of managing owners raises the levels of asymmetric
information. This is consistent with Table 3.
49
Table 4. The analysis of forecast accuracy across ownership structure.

ERROR   1  1 HERF   2 own0 _ 10   3 own10 _ 30   4 own30
  5 own0 _ 10 * HERF   6 own10 _ 30 * HERF   7 own30 * HERF
  8 * ANALYST   9 Ln(TA)  10 RDSALES  11 LEVG  12 INATA
 13VOLATILITY                            m4
m1 m2 m3 m4
Intercept -0.0199*** 0.0014 0.0094* -0.0191***
(-3.67) (0.63) (1.90) (-3.50)
HERF 0.0081*** 0.0010 0.0016 0.0034
(4.49) (0.25) (0.41) (0.88)
own0_10 0.0258* 0.0381** 0.0319* 0.0255
(1.70) (1.98) (1.66) (1.34)
own10_30 0.0242*** 0.0124 0.0079 0.0104
(3.31) (1.36) (0.87) (1.16)
own30 0.0026 0.0093** 0.0088** 0.0092**
(0.68) (2.04) (1.94) (2.05)
own10* HERF -0.0142 -0.0215 -0.0120
(-0.24) (-0.36) (-0.20)
own10_30* HERF 0.0834*** 0.0884*** 0.0831***
(2.70) (2.87) (2.73)
own30* HERF -0.0455*** -0.0415*** -0.0416***
(-2.83) (-2.59) (-2.62)
ANALYST -0.0003*** -0.0002** -0.0003***
(-3.45) (-2.53) (-3.44)
Ln(TA) 0.0012*** -0.0002 0.0011***
(3.12) (-0.57) (3.10)
RDSALES -0.0001 -0.0018 -0.0002
(-0.06) (-0.85) (-0.08)
LEVG 0.0145*** 0.0156*** 0.0146***
(6.30) (6.70) (6.31)
INATA -0.1977*** -0.2162*** -0.1977***
(-4.08) (-4.43) (-4.09)
VOLATILITY 0.4324*** 0.4316***
(11.81) (11.79)
Adjusted R2 0.12 0.10 0.11 0.12
F -Value 41.88 37.44 33.8 38.02
In addition, we see from the coefficients of the interaction between ownership variables
and HERF from m2 to m4, that the effects of ownership are significantly different for focused
and diversified firms. For medium concentrated ownership levels between 10% and 30%,
forecast error is significantly higher for the diversified firms. This suggests that more
entrenchment problems exit on diversified firms. However, beyond 30%, asymmetric
information is significantly lower for diversified firms. Hence, there are alignment effects.
The coefficient of Ln(TA) changes direction from m3 insignificantly negative to m4
significantly positive. This may be due to the negative correlation (Table 2-2) between the
size of the corporation and volatility (Xu and Malkiei, 2003). The large corporation increases
the accuracy of analysts’ forecasts in part through its effect on volatility. However, after
50
completely controlling this effect, the large corporation decreases the accuracy of analysts’
forecasts. This situation is similar to Thomas (2002). The relations between ERROR and
other control variables, and the adjusted R2 are similar to the regression A of Table 3.
4.3.2 The regressions’ results of forecast dispersion
Table 5. The analysis of forecast dispersion across ownership structure.
DISPERSION   1  1 HERF   2 own0 _ 10   3 own10 _ 30   4 own30
  5 own0 _ 10 * HERF   6 own10 _ 30 * HERF   7 own30 * HERF
  8 * ANALYST   9 Ln(TA) 10 RDSALES  11 LEVG  12 INATA
 13VOLATILITY                          m4
m1 m2 m3 m4
Intercept -0.0056*** 0.0006 0.0061*** -0.0052***
(-3.14) (0.81) (3.69) (-2.90)
HERF 0.0020*** -0.0012 -0.0007 0.0001
(3.40) (-0.96) (-0.53) (0.05)
own0_10 0.0048 0.0078 0.0035 0.0012
(0.96) (1.20) (0.55) (0.19)
own10_30 0.0063*** 0.0048 0.0023 0.0033
(2.59) (1.56) (0.76) (1.09)
own30 0.0014 0.0041*** 0.0038** 0.0040***
(1.11) (2.68) (2.52) (2.66)
own10* HERF 0.0156 0.0120 0.0150
(0.77) (0.60) (0.76)
own10_30* HERF 0.0184* 0.0207** 0.0188*
(1.77) (2.02) (1.85)
own30* HERF -0.0184*** -0.0165*** -0.0165***
(-3.43) (-3.11) (-3.15)
ANALYST -0.0002*** -0.0001*** -0.0002***
(-5.80) (-4.65) (-5.75)
Ln(TA) 0.0004*** -0.0002 0.0004***
(2.92) (-1.53) (2.86)
RDSALES -0.0002 -0.0008 -0.0002
(-0.24) (-1.18) (-0.28)
LEVG 0.0071*** 0.0074*** 0.0070***
(9.20) (9.45) (9.13)
INATA -0.0987*** -0.1059*** -0.0985***
(-6.13) (-6.50) (-6.12)
VOLATILITY 0.1722*** 0.1722***
(14.14) (14.15)
Adj R-Sq 0.15 0.11 0.13 0.15
F Value 54.56 43.45 42.96 49.46
Table 5 is the regressions’ results for forecast dispersion across ownership structure. The
relation between HERF and DISPERSION is similar to Table 4 concerning the relation
between HERF and ERROR. The coefficient of HERF is significantly positive in m1. This
means that corporate diversification can raise forecast dispersion. Only the coefficient of
medium concentrated ownership levels between 10% and 30% is significantly positive in m1.
51
The coefficients of low concentrated ownership and high concentrated ownership are positive,
but insignificantly. This means that the increase of ownership raises forecast dispersion.
In addition, regarding the effects of ownership that interact with HERF; they are similar
to Table 4. For medium concentrated ownership levels between 10% and 30%, forecast
dispersion is significantly higher for the diversified firms. This suggests that more
expropriation of minority shareholders exit on diversified firms. However, beyond 30%,
asymmetric information is significantly lower for diversified firms. This means that there are
alignment effects. The relations between DISPERSION and other control variables, fixed
effect test, and the adjusted R2 are similar to Table 4.
4.3.3 The regressions’ results of price impact of unexpected earning
The regression results of absolute abnormal returns around earnings announcements are
reported in Table 6. The coefficients of HERF have significantly negative relations with |AR|
from m1 to m3 regression. This indicates that focused firms have significantly larger
abnormal returns around earnings announcements than diversified firms. This is consistent
with the correlation in Table 2-2, and the result of Panel C in Table 3. If the managers of
focused firms have released substantial private information only at earnings announcements,
the reactions to earnings announcements by focused firms are larger. This implies that
focused firms have higher information asymmetry between insiders and outsiders than
diversified firms (Dierkens, 1991). The results of HERF on asymmetric information proxy for
|AR| are different from Table 4 and Table 5. The conflicting results are consistent with
Thomas (2002), and the possible reason is same as the foregoing.
For the effect of ownership structure on asymmetric information, the concentrated
ownership levels less than 30% have no significant relation with |AR| in m1. This implies that
the ownership structure is not an important factor affecting the absolute abnormal returns
around earnings announcements when the ownership of controlling owner less than 30%.
However, for the high concentrated ownership levels beyond 30%, there is a negative link
between ownership concentration and |AR|. One interpretation of these results is that if
managers do not improve the disclosure of information, their share value will be substantially
discounted by the market. This is due to the fact that their ownership is larger than 30%, and
it raises the alignment effect. In regression m2 to m4, we add the interaction between
ownership structure and diversification. All interactions have no significant relation with |AR|.
This implies that there are no significant relations between asymmetric information and
corporate diversification across ownership structure.
ERROR has a positive relation with |AR|, and this is consistent with senses. The larger
the analysts forecast error is, the larger the market reaction will be. However, DISPERSION
is not a factor of |AR|. This shows that the level of analysts’ forecast disagreement does affect
the expectation of the investor. In addition, the coefficient of ANALYST and Ln (MB) are
positive, the coefficient of Ln(MV) and LEVG are negative. One interpretation of these
results is that it is difficult for outsiders to forecast the earnings of the firms with many
analysts participating and higher growths. It is easier for the investor to forecast the earnings
of larger firms and higher leveraged firms. These results are in contrast to the results of
ERROR and DISPERSION. These results are same as Table 3.
52
Table 6. The analysis of earnings announcement abnormal returns across ownership

structure.
AR   1  1 HERF   2 own0 _ 10   3 own10 _ 30   4 own30   5 own0 _ 10 * HERF
  6 own10 _ 30 * HERF   7 own30 * HERF   8 * ERROR   9 * DISPERSION
 10 ANALYST  11 Ln( MV ) 12 LEVG  13 Ln( MB)            m4
m1 m2 m3 m4
Intercept 0.0214*** 0.0116*** 0.0116*** 0.0212***
(14.82) (10.00) (10.05) (14.36)
HERF -0.0044*** -0.0080*** -0.0080*** -0.0032
(-4.61) (-3.82) (-3.80) (-1.52)
own0_10 0.0045 0.0226** 0.0218** 0.0092
(0.55) (2.17) (2.10) (0.89)
own10_30 -0.0032 -0.0025 -0.0026 -0.0038
(-0.82) (-0.51) (-0.52) (-0.78)
own30 -0.0059*** -0.0058** -0.0062** -0.0068***
(-2.87) (-2.41) (-2.54) (-2.83)
own10* HERF -0.0284 -0.0286 -0.0237
(-0.87) (-0.87) (-0.73)
own10_30* HERF 0.0060 0.0053 0.0023
(0.36) (0.32) (0.14)
own30* HERF 0.0129 0.0123 0.0065
(1.50) (1.42) (0.76)
ERROR 0.0072*** 0.0073*** 0.0072***
(4.22) (4.26) (4.20)
Dispersion 0.0044 0.0069 0.0044
(0.71) (1.11) (0.71)
ANALYST 0.0001*** 0.0001***
(2.73) (2.73)
Ln(MV) -0.0022*** -0.0021***
(-10.13) (-10.10)
LEVG -0.0051*** -0.0050***
(-3.97) (-3.90)
Ln(MB) 0.0020*** 0.0020***
(6.44) (6.35)
Adj R^2 0.0602 0.0361 0.0394 0.0600
F Value 18.93 12.86 12.93 17.01
4.3.4 The regressions’ results of adverse -selection component of bid-ask spread

The regression results of the adverse-selection component of bid-ask spread are reported
in Table 7. The coefficient of HERF on the adverse-selection component of bid-ask spread
(ASC) is significantly positive in m1 regression. This is similar to the results of Table 4 and 5.
This indicates that diversification will worsen asymmetric information (ASC). Therefore,
diversified firms have higher asymmetric information than focused firms.
For the effect of ownership structure on the adverse-selection component, only low
ownership concentration levels less than 10% have a significant positive relation with ASC in
53
m1. This shows that increases in ownership concentration less than 10% lead to an increase in
asymmetric information. Therefore, there is an entrenchment effect in low ownership
concentration levels less than 10%.
The coefficients on the interaction between ownership concentration variables and HERF
differ from the results of ERROR and DISPERSION. The coefficients on the interaction are
significantly positive for ownership concentration levels less than 10%. In result, there are
entrenchment problems on diversified firms. The coefficients on the interaction are
insignificant for ownership concentration levels between 10% and 30%, and the
entrenchment effects maybe be offset by alignment effects. The coefficients on the
interaction are significantly negative for ownership concentration levels beyond 30%. This
indicates that asymmetric information is significantly lower for diversified firms. Hence,
there are alignment effects similar to the results of ERROR and DISPERSION.
For other control variables, ERROR has a positive relation with the adverse-selection
component. However, DISPERSION has an insignificant relation with ASC, and this is
similar to the results of |AR|. This is different from the front, and the number of analysts has a
positive relation with the adverse-selection component. This indicates that more analysts
participating in analysis of a given firm induce high levels of the adverse-selection
component. The more the analysts there are, the higher the asymmetric information will be.
Therefore, the more the analysts there are, the higher the asymmetric information will be.
LEVG has positive relation with ASC, consistent with the results of Table 4 and 5.
54
Table 7. The analysis of the adverse -selection component of bid-ask spread across
ownership structure.
ASC   1  1 HERF   2 own0 _ 10   3 own10 _ 30   4 own30   5 own0 _ 10 * HERF
  6 own10 _ 30 * HERF   7 own30 * HERF   8 ERROR   9 DISPERSION
 10 ANALYST  11 Ln( MV ) 12 LEVG  13 Ln( MB)          m4
m1 m2 m3 m4
Intercept 0.1967*** 0.2526*** 0.2533*** 0.2163***
(4.82) (7.76 ) (7.81 ) (5.20)
HERF 0.1129*** -0.0120 -0.0123 -0.0163
(4.10) (-0.20) (-0.21) (-0.27)
own0_10 0.5848** 0.0005 -0.0201 0.0616
(2.49) (0.00 ) (-0.07 ) (0.21)
own10_30 0.1479 0.2441* 0.2323 0.2300*
(1.30) (1.75) (1.67) (1.65)
own30 0.0845 0.1638** 0.1630** 0.1701**
(1.41) (2.31) (2.31 ) (2.41)
own10* HERF 2.7663*** 2.7535*** 2.6492***
(3.00) (3.00) (2.88)
own10_30* HERF -0.4555 -0.4590 -0.4008
(-0.96 ) (-0.97) (-0.85)
own30* HERF -0.5584** -0.5924** -0.5885**
(-2.23) (-2.38) (-2.36)
ERROR 0.3451*** 0.3568*** 0.3486***
(6.85) (7.09) (6.92)
DISPERSION -0.0894 -0.1008 -0.0948
(-0.49) (-0.56) (-0.52)
ANALYST 0.0027** 0.0026*
(1.97) (1.90)
Ln(MV) -0.0034 -0.0031
(-0.57) (-0.52)
LEVG 0.1127*** 0.1047***
(3.08) (2.85)
Ln(MB) 0.0040 0.0063
(0.45) (0.71)
Adj R^2 0.0683 0.0621 0.0689 0.0701
F Value 22.47 23.01 23.57 20.69
4.4 The additional test

Reverse causality is an important problem. Our major subject is the effect of
diversification on asymmetric information, therefore, we use lag 1 variables of HERF and lag
1 variables of size as instrument variables of HERF regression in the simplest models
(explanatory variable only include HERF and year dummy) for four measures of asymmetric
information. The χ2 of all tests are insignificant (The χ2 of test for ERROR, DISPERSION,
|AR|, and adverse-selection components are 7.30, 12.77, 6.28, and 13.14 separately.). This
can prove that reverse causality seems unlikely.
55
Liquidity has a positive relationship with information asymmetry (Koski and Michaely,
2000). Therefore, we add a control variable of liquidity measured by trading volume to
substitute for volatility, and this is deflated by outstanding shares of a firm. The results (not
disclosure) are similar to the volatility. This indicates that trading volume has a significantly
positive relation with the measure of asymmetric information, and the results of other
variables on asymmetric information are similar to the front.
5. Conclusions
This study examines the effect of corporate diversification on asymmetric information

measured by analyst forecast error, analyst forecast dispersion, absolute abnormal returns
around earnings announcements, and the adverse-selection component of bid-ask spread. We
separated samples into three ownership groups. These include: Low concentrated ownership
structure (closely held shares are less 10%), medium concentrated ownership structure
(closely held shares lie in between 10% and 30%), and high concentrated corporate
ownership (closely held shares are more than 30%). In addition, we extend the samples to 28
global countries, which raise the validity of our empirical findings.
For the global sample, diversified firms exhibit higher levels of asymmetric information
measured by the analyst forecast error, dispersion, and adverse-selection component than
focused firms. However, diversified firms exhibit lower absolute abnormal returns around
earnings announcements than focused firms. In addition, the ownership structure is an
important factor of information asymmetry. The increase of ownership concentration
basically induces higher levels of asymmetric information measured by the analyst forecast
error, dispersion, and adverse-selection component. The key point deciding the influence
direction of diversification on asymmetric information is possibly the firm’s ownership
structure.
The effect of corporate diversification on asymmetric information differs across
ownership structures. For medium concentrated ownership levels between 10% and 30%,
analyst forecast error and dispersions are significantly higher for the diversified firms. For
low corporate ownership levels less than 10%, the adverse-selection component is
significantly higher for the diversified firms. These results imply that there are more
entrenchment problems for diversified firms when corporate ownership is less than a certain
level. For high concentrated corporate ownership beyond 30%, diversified firms have lower
analyst forecast errors, dispersions, and an adverse-selection component. Therefore, there are
alignment effects for diversified firms.
The third measure of asymmetric information, absolute abnormal returns around earnings
announcements, has a negative relationship with the level of corporate diversification. This
implies that diversification can decrease absolute abnormal returns around earnings
announcements. The possible reason is that diversification induce volatility significantly
reduces (volatility effect) and further affects the abnormal return. These effects may
interactively induce the negative relationship between the level of diversification and
absolute abnormal return.
Finally, we hope that these results can help to shed some light on a disputed question
associated with the corporate diversification literature on why some firms remain diversified
and some firms remain refocused. We hope that these results can help corporations decide
whether or not to diversify when considering the expansion of firm size.
56
References
Aboody, D., Lev, B. (2000) Information asymmetry, R&D, and insider gains. The Journal of
Finance, 55(6), 2747-2766.
Alford, A., Berger, P. (1999) A simultaneous equations analysis of forecast accuracy analyst
following and trading volume. Journal of Accounting Auditing and Finance, 14(3), 219-
240.
Amihud, Y., Lev, B. (1981) Risk reduction as a managerial motive for conglomerate mergers.
Bell Journal of Economics, 12(2), 605–617.
Bhat, G., Hope, O., Kang, T. (2006) Does corporate governance transparency affect the
accuracy of analyst forecasts? Accounting and Finance, 46(5), 715–732.
Brennan, M.J., Subrahmanyam, A. (1995) Investment analysis and price formation in
securities markets. Journal of Financial Economics, 38(3), 361-381.
Comment, R., Jarrell, G. (1995) Corporate focus and stock returns. Journal of Financial
Economics, 37(1), 67–87.
Denis, D.J., Denis, D.K., Sarin, A. (1997) Agency Problems, Equity Ownership, and
Corporate Diversification. Journal of Finance, 52(1), 135-160.
Dierkens, N. (1991) Information asymmetry and equity issues. Journal of financial and
quantitative Analysis, 26(2), 181-199.
Fan, J.P.H., Wong, T.J. (2002) Corporate ownership structure and the informativeness of
accounting earnings in East Asia. Journal of Accounting and Economics, 33(3), 401–425.
Fauver, L., Houston, J., Naranjo, A. (2004) Cross-country evidence on the value of corporate
industrial and international diversification. Journal of Corporate Finance, 10(5), 729– 752.
Fauver, L., Houston, J, Naranjo, A. (2003) Capital Market Development, International
Integration, Legal Systems, and the Value of Corporate Diversification: A Cross-Country
Analysis. The Journal of Financial and Quantitative Analysis, 38(1), 135 -157.
Fernandes, N., Ferreira M.A. (2008) Does international cross-listing improve the information
environment. Journal of Financial Economics, 88(2), 216–244.
Freund, S., Trahan, E.A., Vasudevan, G.K. (2007) Effects of Global and Industrial
Diversification on Firm Value and Operating Performance. Financial Management, 36(4),
143-161.
George, T.J., Kaul, G., Nimalendran, M. (1991) Estimation of the Bid-Ask Spread and Its
Components: A New Approach. The Review of Financial Studies, 4(4), 623-656.
Gorton, G., Pennacchi, G. (1993) Security baskets and index-linked securities. Journal of
Business, 66(1), 1-27.
Gomes, A. (2000) Going public without governance: Managerial reputation effects. Journal
of Finance, 55(2), 615–646.
Habib, M., Johnsen, D.B., Naik, N. (1997) Spinoffs and information. Journal of Financial
Intermediation, 6(2), 153-176.
Hadlock, C.J., Ryngaert, M., Thomas, S. (2001) Corporate Structure and Equity Offerings:
Are There Benefits to Diversification? Journal of Business, 74(4), 613-635.
Healy, P., Palepu, K. (2001) Information Asymmetry, Corporate Disclosure, and the Capital
Markets: A Review of the Empirical Disclosure Literature. Journal of Accounting and
Economics, 31(3), 405-440.
Hoskisson, R.E., Johnson, R.A., Tinhanyi, L., White, R.E. (2005) Diversified Business
Groups and Corporate Refocusing in Emerging Economies. Journal of Management,
31(6), 941-965.
Hyland, D.C., Diltz, J.D. (2002) Why firms diversify: An empirical examination. Financial
Management, 31(1), 51-82.
57
Jensen, M.C., Meckling, W.H. (1992) Specific and general knowledge, and organizational
structure. In: Werin, L., Wijkander, H. (Eds.), Contract Economics. Blackwell, Oxford,
251–274.
Koski, J.L., Michaely, R. (2000) Prices, liquidity, and the information content of trades.
Review of Financial Studies, 13(3), 659-696.
Krishnaswami, S., Subramaniam, V. (1999) Information asymmetry, valuation, and the
corporate spin-off decision. Journal of Financial Economics, 53(1), 73– 112.
Lamont, O.A., Polk, C. (2001) The Diversification Discount: Cash Flows Versus Returns.
The Journal of Finance, 56(5), 1693–1721.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., Vishny, R. (1998) Law and finance. Journal
of Political Economy, 106(6), 1113-1155.
Mansi, S.A., Reeb, D.M. (2002) Corporate Diversification: What Gets Discounted? The
Journal of Finance, 57(5), 2167- 2183.
Morck, R., Shleifer, A., Vishny, R. (1988) Management Ownership and Market Valuation:
An Empirical Analysis. Journal of Financial Economics, 20(January–March), 293-315.
Nanda, V., Narayanan, M. P. (1999) Disentangling Value: Financing Needs, Firm Scope, and
Divestitures. Journal of Financial Intermediation, 8(3), 174-204.
O’Brien, P.C. (1988) Analysts’ forecasts and earnings expectations. Journal of Accounting
and Economics, 10(1), 53–83.
Roll, R. (1984) A Simple Measure of the Effective Bid-Ask Spread in an Efficient Market.
Journal of Finance, 39(4), 1127-1139.
Ross, S.A. (1989) Information and Volatility: The No-Arbitrage Martingale Approach to
Timing and Resolution Irrelevancy. The Journal of Finance , 44(1), 1-17.
Rumelt, R. (1982) Diversification strategy and profitability. Strategic Management Journal,
3(4), 359– 369.
Shelton, L. (1988) Strategic business fits and corporate acquisition: empirical evidence.
Strategic Management Journal, 9(3), 279– 287.
Stoll, H.R. (1989) Inferring the Components of the Bid-Ask Spread: Theory and Empirical
Tests. Journal of Finance, 44(1), 115-134.
Subrahmanyam, A. (1991) A theory of trading stock index futures. Review of Financial
Studies, 4(1), 17-51.
Thomas, S. (2002) Firm diversification and asymmetric information: Evidence from analysts’
forecasts and earnings announcement. Journal of Financial Economics, 64(3), 373-396.
Verrecchia, R. (2001) Essays on Disclosure. Journal of Accounting and Economics, 32(4),
97-180.
Xu, Y., Malkiel, B.G. (2003) Investigating the Behavior of Idiosyncratic Volatility. Journal
of Business, 76(4), 613-644.
Zhao, R., Millet-Reyes, B. (2007) Ownership Structure and Accounting Information Content:
Evidence from France. Journal of International Financial Management and Accounting,
18(3), 223-246.
58
Asia Pacific Management Review 17(1) (2012) 59-75
www.apmr.management.ncku.edu.tw
Does Monitoring Frequency Affect Budget Execution Patterns?

Jinn-Yang Uang a,, Ching-Wan Liang b
a
Department of Accounting, Chinese Culture University, Taiwan
b
Comptroller Bureau, Ministry of National Defense, Taiwan
Received 12 October 2009; Received in revised form 17 November 2010; Accepted 18 February 2011
Abstract
Delays in budget execution till the end of the fiscal year have long been of major concern
to governments worldwide. In an attempt to deal with this, the Taiwanese government
introduced a midyear budget execution review into its budgetary system. This study aims to
examine the impact of this extra monitoring mechanism on budget execution patterns. Using
the defense units as a sample, we find that the first half-year budget execution rate increases
and the high concentration of budget execution for the second half of the year is significantly
reduced after the introduction of the midyear review. Overall, the results indicate that public
budget execution suffers from managers’ opportunism and that closer monitoring helps
mitigate such opportunistic behavior.
Keywords: Budget execution, monitoring frequency, execution pattern, behavior
1. Introduction
Governments have long used budgets to help implement their policies; however, failure to
comply with the budget execution time schedule set forth in the budget plan has been a major
problem facing governments worldwide (Blondal, 2003). Specifically, governmental agencies
often experience low budget execution rates in the early months of the fiscal year and
postpone the execution of budgets till the end of the fiscal year. Such budget execution
patterns cause the public to question the function of budget planning. Moreover, the high
concentration of budget spending in the last months leads to the skepticism that the agencies
consume the budget, since the budget seems to be rushed to spend in a short period of time
(Chang et al., 1999).
Along with the increasing expansion of government budget deficits, criticism extends to
public budget management, leading to a need to pay extra attention to the problems of budget
execution inefficiency. Consequently, the drivers of budget execution delays have become a
key issue requiring investigation. In this regard, there are two competing views. One is that
budget execution delays are due solely to uncontrollable factors which occur after the budgets
have been prepared, since government budgets are normally finalized one year before the
implementation year. The other view is that the delays are mainly driven by managers’
opportunistic behavior. Nevertheless, the issue of what in reality drives the delays remains
largely unexamined.
The Taiwanese government, however, introduced a midyear budget review, called the
Semi-annual Balance Statement (SBS), into its budgetary systems based on the assumption
that budget execution suffers from agency problems. This provides a unique opportunity to
examine the two contrasting views. Specifically, the prime motivation of the new regulatory
regime is to reduce the budget managers’ opportunistic behavior in dealing with budget

Corresponding author. Email: wjy8@faculty.pccu.edu.tw
59
J.-Y. Uang, C.-W. Liang / Asia Pacific Management Review 17(1) (2012) 59-75
execution by adding a midyear budget execution review. However, such an objective will not
be achieved if the delays are purely caused by uncertain or uncontrollable factors embedded
in the budgetary process.
This study aims to examine this controversial issue by conducting an empirical study.
Using Taiwan’s Defense Units as a sample, this research demonstrates that the first half-year
budget execution rate increases and the high concentration of budget execution for the second
half of the fiscal year is reduced after adding the independent midyear review, in line with the
policy setters’ expectations. Based on these findings, this study concludes that budget
execution delays are not driven purely by uncertain or uncontrollable events and that closer
monitoring helps close the expectations gap in budget execution.
The remainder of this paper is organized as follows. The second section reviews relevant
budget execution issues, discusses previous research, and then develops the hypothesis. The
third section describes the data and empirical models. The fourth section presents the findings.
The final section presents conclusions derived from the findings and provides some
suggestions for policy makers.
2. Literature review and hypothesis development
2.1 Taiwan’s budgetary system

The overall budgetary process in Taiwan is divided into four stages: (a) budget
preparation, (b) budget proposal review, (c) budget execution, and (d) budget audit. Budget
preparation occurs during the first eight months (January to August) of the preceding year.
The budget proposal review stage is effectively set for September through November since
the Congress (Legislative Yuan) is required by the Constitution to complete its budget review
one month before the new fiscal year starts. Budget execution, of course, takes place
throughout the fiscal year by individual agencies and authorities. Finally, the Ministry of
Audit (MOA) reviews and audits the budget both during the fiscal year and following its
close.
2.1.1 Budget Preparation
Each year the Directorate-General of Budgeting, Accounting and Statistics (DGBAS) in
the Executive Yuan prepares and coordinates the Central Government General Budget
(DGBAS, 2009a). It begins by issuing the Instructions and Guidelines on the Preparation of
the Central and Local Government Budget (DGBAS, 2009b) to guide the central and local
governments in preparing their annual budget estimates. The various governmental agencies
and authorities (e.g. expenditure units) are responsible for developing their initial budget
estimates. Once all the individual proposals are submitted to the Executive Yuan, DGBAS
initiates a review process to make sure that the annual expenditures of each authority have
not exceeded their assigned limits. Finally, the formal budget proposal is prepared for
legislative review.
2.1.2 Budget proposal review
The budget proposal review starts with the so-called First Reading in which the Premier,
the Minister of Finance, and the Minister of DGBAS must report on the annual administrative
plan and budget formulation in person to the Legislative Yuan and answer questions from
individual legislators. Once this stage is completed, the budget proposal is broken up by
subject matter and referred to one of the eight substantive committees: Internal Affairs,
Foreign Affairs and National Defense, Economic Affairs, Finance, Education and Cultural
Affairs, Transportation, Justice and Legal Affairs, and Social Welfare and Environmental
Hygiene. During their deliberations on the budget bills, the committees may invite relevant
60
government employees to attend committee meetings, to present oral explanations concerning

the budget, to answer questions, and to provide information for the committee members’
reference. When the committees finish working on the budget, they submit their results to the
Finance Committee for integration into a comprehensive report to the Legislative Yuan in
preparation for the Second Reading.
At the Second Reading, the proposed budget is subjected to both general discussion and
article-by-article discussion. At this stage, the legislators can decide upon revision, re-
examination, revocation, or withdrawal. Once the proposed budget bill has completed the
Second Reading, it proceeds to the Third Reading in the following Sitting of the Legislative
Yuan. The only changes that can take place at the Third Reading are phrasing revisions,
unless a bill is found to be self-contradictory, unconstitutional, or in conflict with other laws.
The budgetary bills that successfully complete the Third Reading are then sent to the
Executive Yuan and to the President for promulgation.
2.1.3 Budget Execution
According to the Instructions and Guidelines on the Budget Execution of Central
Government Agencies (DGBAS, 2009c), budget execution by the individual agencies and
authorities includes distributing budget expenditures, exercising budget control, asking for
supplementary budget support if necessary, and performing a performance evaluation of
budgetary activities. At the beginning of every quarter, each authority or agency (Comptroller
Bureau in the case of the Ministry of Defense) has to distribute its budget to subordinate
agencies or expenditure units, with the funds allocated on a month-by-month basis or
according to some other specific time period.
The objective of budget control is to ensure that governmental agencies use funds
following the time schedule set up in the budget plan. In other words, delays in budget
spending or execution are not allowed, and administrative units with budget backlogs or
delayed expenditures will encounter problems at the last stage of the budget audit. When an
administrative unit finds its budget is insufficient, it can ask for supplementary funds.
However, based on the Budget Act, a supplementary budget request can only be initiated
under fairly limited circumstances, and the supplementary budget has to go through the same
complex process as the formal budget proposal.
2.1.4 Budget Audit
According to the Audit Act, when the fiscal year comes to the end, each authority has to
submit an overall financial statement with a full performance report to the Ministry of Audit
for the final audit. Based on these reports, the MOA scrutinizes whether the revenues and
expenditures were executed as planned. At the end of the process, the Auditor-General has to
prepare and submit the annual Audit Report to the Legislative Yuan, which provides a
reference point for legislators when they deliberate on subsequent budget proposals. However,
it should be noted that, although the budget performance evaluation is used to ensure each
unit executes its budget as planned, the audit focuses only on money flows rather than on
performance or policy outputs since performance measurement is not very well developed.
2.2 Managers’ behavior and budget execution
In the four-stage budget cycle, budget preparation and budget execution are administered
by the executive. Budget preparation is planning for policy accomplishment, and budget
execution is managing the budget plan for policy implementation (McCaffery and Mutty,
1999). As Pitsvada (1983) states: “Budget execution can be defined as the phase of the
budget cycle in which agencies actually obligate or commit funds in pursuit of accomplishing
programmatic goals.”
61
Over the past few decades, while a substantial body of budgeting literature has been
developed, much of the available literature about budget administration has concentrated its
interest upon budget preparation; only secondary attention has been given to the problems of
budget execution (Pitsvada, 1983; Jones and Thompson, 1986; Klase et al., 2001; Dougherty
et al., 2003). As budget execution has been traditionally thought to be a relatively straight-
forward activity of implementing the budget as approved, it has become the most neglected
area of budget management research (Klase et al., 2001). Jones and Thompson (1986), for
example, point out that: “The practices of public budget formulation are relatively well
documented and understood; however, budget execution has not been examined nearly as
carefully, despite the importance of budget control for sound financial management in
government.”
Pitsvada (1983) also calls for more study of budget execution. He points out that: ‘It is,
after all, the entire reason that agencies prepare and justify budgets and Congress enacts
them.’ In recent years, there has been an attempt to “reinvent government” in order to
improve the performance of government operations (Osborne and Gaebler, 1993). In the US,
this led to the imposition of legislation at the federal level embodied in the Government
Performance and Results Act of 1993 (Kravchuk and Schack, 1996). Similar initiatives have
been undertaken in Australia, Canada, New Zealand and the United Kingdom (Atkinson and
McCrindell, 1997; Hood, 1995). These new developments, together with the increasing
expansion of government budget deficits, have led interested parties to pay extra attention to
the problems of budget execution inefficiency.
In response to the concern over budget execution, Kozar (1993) explores the United
States’ operations and maintenance (O&M) accounts of Division of Defense (DOD) over 14
fiscal years from 1977 to 1990. He finds that O&M account managers obligated over 99 per
cent of their funds before the appropriation expired at the end of the year. Kozar and
McCaffery (1994) add a comment on this by stating that: “This is a remarkable performance
by these fund managers, given legal constraints and penalties against overspending.” In an
ensuing study, however, McCaffery and Mutty (1999) comment on this by stating that: “Data
from Kozar’s study seem to support the rush to spend funds at the end of the fiscal year.”
They particularly indicate that: “When the O&M appropriation expires at the end of the fiscal
year, any unobligated funds are lost. This gives managers a very strong incentive to spend all
available funds and explains the percent of the obligation rate.”
Osborne and Gaebler (1993) also note that, if budget managers do not spend their entire
budget by the end of the fiscal year, they must return the remaining balance to the general
fund of the Treasury, they are admonished for imprecise budget preparation and even receive
less the next year. Chang et al. (1999) lend support to the above argument. Specifically, they
examine budget spending patterns of 28 Taiwanese central government agencies, using
quarterly panel data from fiscal years 1989 to 1995. Their findings show that the average
budget execution rate of the government for the fourth quarter of the fiscal year is
significantly higher than that for the other quarters. They speculate that such concentration
patterns might not be related to the uncertainties of tasks, but related to budget consumption.
Without evidence, however, they contend that such a spending surge is associated with
managers’ behavior in budget execution. More directly, McCaffery and Jones (2004) point
out that: “Not only do they (DOD budget managers) feel this pressure (to obligate their
money before the end of the fiscal year), but they also feel that having money left over is
regarded as a sin by their superiors higher up in the chain of command. They also feel their
superiors will punish them for not obligating all of their budgets and apocryphal tales
circulate through the junior officer community about officers who have been marked down
on their fitness report because they failed to obligate all the money in their budget.”
62
The above literature review shows that the problem of budget execution delays in the
early months of the year or budget execution concentration in the last months of the year has
posed a serious threat to government operations. However, what drives the budget execution
delays? There are two competing views. One view, mainly put forward by the administrative
agencies involved in budget execution delays, is that the delays are caused by uncontrollable
factors which arise after the budgets are prepared. This may be a convincing reason to justify
the delays, as government budgets are normally finalized one year before the implementation
year. For example, based on budget data and interviews with budget examiners and
administrators in Missouri state government, Forrester (1993) finds that within-year
budgetary changes are a regular part of the budgetary process but are mostly caused by
difficulties in estimated expenditure needs and revenue flows, and unanticipated economic
changes.
In line with the above contention, McCaffery and Jones (2004) point out that: “At the
heart, the budget process is a planning process. It is about what should happen in the future.
For nondefense agencies, this planning process may involve agency estimation of the amount
of services to be provided in the next year. For defense agencies, it may involve estimation of
the consequences of U.S. foreign policy commitments and defense resource planning in terms
of threat response capacity and the personnel and support resources necessary for threat
management and deterrence. While numbers and quantification give the budget document the
aura of precision, it is still a plan; this is most clearly evident in budget execution, where
agencies struggle to spend the budget they have received in an environment inevitably
changed from the one for which the budget was developed.”
The other competing explanation for why the agencies do not spend budgets following
the time schedule set forth in the budget plans is that budget execution suffers from
managers’ opportunistic behavior. According to agency theory, the principal-agent
relationship is defined generically as a contract wherein a party (the principal) retains another
(the agent) to accept the delegation of the principal’s authority to accomplish some purpose
(Jensen and Meckling, 1976). However, principals and agents do not always have the same
goal. When conflicting interests arise, the agent may pursue their own interests at the expense
of the interests of the principal (Ahmed and Duellman, 2007; Burgstahler et al., 2006;
Sharma, 1997). A body of literature in the corporate governance area maintains that agency
problems are intensified, and the principal’s welfare is diminished, in the presence of
information asymmetry, lack of monitoring mechanisms, and severe separation of ownership
and control in organizations (Ahmed and Duellman, 2007; Ashbaugh-Skaife et al., 2006).
This seems the case of government agencies, as they are often markedly bureaucratic, less
transparent and subject to less monitoring. For example, the free-rider theory argues that each
citizen may rely on other citizens to monitor government agencies.
External governance mechanisms that provide independent monitoring of management
may guard against opportunistic management behavior and promote effective managerial
decision making. While government agencies on their own establish monitoring systems
(self-regulation and self-monitoring), many countries through the legislative or regulatory
process require additional layers of monitoring, including annual reports filed with a
government regulatory agency and in some cases an even more activist role for that agency
with responsibility for investigating allegations of non-reporting or mis-reporting, or for
corruption or non-compliance (Dixit et al., 1997; Grossman and Hart, 1983; Lund and
McLuckie, 2007).
However, doses the view derived from agency theory better fit the real world or the
argument derived from unanticipated economic changes? This issue remains unclear. A new
budgetary regime introduced by the Taiwanese government provides a unique opportunity to
examine the question. Specifically, assuming that agency problems exist in the process of
63
budget execution, the Taiwanese Congress passed an amendment to the Budget Law, called
the Semi-annual Balance Statement (SBS). This mandates all governmental agencies to
determine the difference between amounts that have been budgeted and actual results as at
the end of June, and to prepare a midyear report on budget execution (Taiwan’s fiscal year
starts from January and ends in December) in addition to the final report at the end of the
fiscal year.
The midyear report is required to be first audited by the Ministry of Audit (MOA), an
independent agency, then presented to the Congress, and eventually made open to the public.
Under this new regulatory regime, governmental agencies are expected to obligate their entire
funds apportioned for the first six months by the end of June. If the agencies do not obligate
(spend) their entire (January through June) budget before the end of June, they will lose the
right to use it unless they are able to convince their superior auditing office (Comptroller
Bureau in the case of the Ministry of Defense) that a delay in budget execution is necessary.
Apparently, the prime motivation of this new regulatory regime is to reduce budget
managers’ opportunistic behavior in dealing with budget execution and thus improve the
budget execution pattern. However, if the delays are caused purely by uncontrollable factors,
as argued by the government agencies, then the objective of the new regulatory regime will
not be achieved. As such, this study sets up the following hypotheses in alternative form to
examine whether monitoring frequency affects the budget execution pattern. Specifically,
Hypothesis A (Ha) seeks to examine whether the adoption of the Semi-annual Balance
Statement leads to higher budget execution rates for the first half of the fiscal year, and
Hypothesis B (Hb) to examine whether the adoption of the Semi-annual Balance Statement
leads to lower budget execution rates for the second half. If the hypotheses are accepted, this
will provide evidence that agency problems play a key role in explaining the delays.
H: Monitoring frequency affects budget execution patterns.
Ha: The adoption of the Semi-annual Balance Statement leads to higher budget
execution rates for the first half of the year.
Hb: The adoption of the Semi-annual Balance Statement leads to lower budget
execution rates for the second half of the year.
3. Methodology
3.1 Data
Budget expenditure units (BEUs) of the Taiwan Ministry of National Defense are used as
my sample, as they are functional units in charge of budget execution. The investigation
period is 2001 to 2003, years which span the periods both before and after the imposition of
the SBS.
This paper focuses on all non-intelligence units and only on operations and maintenance
(O&M) budget accounts. The defense budgets are classified into three categories: Personnel
budget accounts, military investment budget accounts, and operations and maintenance
budget accounts. The personnel budget funds military personnel and civilians who work in
the defense units; the investment budget supports weapon systems, procurement, and research
and development; and the operations and maintenance budget funds all supporting expenses
other than the personnel and investment functions. We focus on O&M budgets since they are
more flexible in terms of spending. Specifically, whether these expenses should be incurred
and how much they should be are more or less subject to managers’ discretion. As pointed
out by McCaffery and Mutty (1999), when quick budget reductions are needed, the O&M
account is often the first target, because it is usually completely disbursed within one year
and therefore a dollar reduction means a dollar of savings in that particular year.
64
We focus on non-intelligence units since budget data of intelligence agencies are

confidential and thus not available for this research. To meet the purpose of this study,
semiannual data are used. All data are electronically-based and taken from the Accounting
Center of the Comptroller Bureau, the Ministry of National Defense.
The temporal distribution of the sample is shown in Table 1. Of the 1,019 unit-year
observations, 337 (33 per cent) are from year 2001, 342 (34 per cent) from year 2002, and
340 (33 per cent) from year 2003. In terms of military departments, 286 (28 per cent) cases
are Central units, 312 (31 per cent) Army units, 101 (10 per cent) Navy units, 76 (7 per cent)
Air Force units, 165 (16 per cent) Combined Logistic Command (CLC) units, 79 (8 per cent)
Reserve Command and Military Police Command (RCMPC) units.
Table 1. Temporal distribution of sample.
Y2001 Y2002 Y2003 Total

Central units 93 97 96 286
Army units 104 104 104 312
Navy units 34 34 33 101
Air Force units 25 25 26 76
Combined Logistic Command units 55 55 55 165
Reserve Command and Military Police Command units 26 27 26 79
Total 337 342 340 1,019
3.2 Empirical models

To examine whether the extra monitoring affects the budget execution pattern, I
specifically focus on the impact of the midyear review on first half-year and second half-year
execution rates. The empirical analysis involves a series of univariate tests (paired-t tests and
Wilcoxon tests), and multiple regression tests in which the variable of interest is SBS, a time
dummy variable (=1 if the observation is taken from the post-SBS period, =0 otherwise). To
serve the purpose of this study, two regression models are run: Model 1 with dependent
variable ER_1st (execution rate for the first half of the year) and Model 2 with dependent
variable ER_2nd (execution rate for the second half of the year).
As mentioned in the hypothesis development section, if first half-year budget execution
rates increase in the post-SBS period, this will lend support to the hypothesis that it is the
principal-agent relationship that lead to the execution delays. In this case, the coefficient on
the SBS variable should be positive in the first regression model (ER_1st). In the same vein
the hypothesis will be upheld if second half-year execution rates decrease in the post-SBS
period, which would be evidenced by the coefficient on the SBS variable being negative in
the second regression model (ER_2nd).
To control for other potential factors affecting budget execution rate, this study
incorporates budget size (SIZE) into the regression models; however, the expected sign is
problematic. Defense units with larger budgets might have a lower rate of budget execution
since budget size is somehow related to work complexity or difficulty. Alternatively however,
units with larger budgets might have a higher budget execution rate since they might create
synergy and operate more efficiently.
The variable CONSIGNED (consigned budget ratio) is also incorporated into the
regression models. Under the defense system, a unit (agent/consignee) may be asked to help
engage in some missions and execute budget funds on behalf of an entrusted unit
(principal/consignor). In this case, however, the agent is permitted to incur expenses and
return the unobligated balance to its legal owner (the principal) at the end of the fiscal year.
65
The legal owner of the budget is the party responsible for its execution under the present
regime. Based on the agency theory argument, an agent may make less effort to accomplish
such missions on schedule due to lack of clear incentives. Thus units in receipt of more
consigned budgets might have a lower rate of budget execution. However, no prior research
has empirically examined this issue. Hence, no sign is predicted. In addition, five dummy
variables representing the different military departments are also included in the models to
account for departmental differences.
ER_1st = γ0+γ1SBS+γ2ARMY+γ3NAVY+γ4AIRFORCE+γ5LOGISTIC+
γ6 RCMPC+ γ7 CONSIGNED+γ8SIZE + ε (1)
ER_2nd= λ0+λ1SBS+λ2ARMY+λ3NAVY+λ4AIRFORCE+λ5LOGISTIC+
λ6 RCMPC+ λ7CONSIGNED+λ8SIZE + ν (2)
Where:
ER = =budget execution rate (AAt / BAt where AAt = actual spending
at t time, BAt = apportioned budgets at t time);
SBS = =1 if the observation is taken from the post-SBS period, =0 if the
observation is taken from the pre-SBS period;
ARMY = =1 if an Army unit, =0 otherwise;
NAVY = =1 if a Navy unit, =0 otherwise;
AIRFORCE = =1 if an Air Force unit, =0 otherwise;
LOGISTIC = =1 if a Combined Logistic Command unit, =0 otherwise;
RCMPC = =1 if a Reserve Command unit or Military Police Command unit,
=0 otherwise;
CONSIGNED = =ratio of consigned budget to total budget;
SIZE = =budget size.
4. Empirical results
4.1 Descriptive statistics

Two sub-samples are created in this study, as we focus on the impact of the SBS on
execution rates for the first half of the year as well as for the second half of the year. Table 2
contains descriptive information for the continuous variables used in this study. Over the
investigated three years, the average value of first half-year execution rates (ER) is 75.6%,
while the average value of second half-year execution rates is 153.4%. The results indicate
that the defense units have difficulty in carrying out their budget plans in the first half of the
fiscal year and thus postpone budget execution to the second half of the year. The mean of
SIZE for the first half-year group is 0.655 and for the second half-year group is 0.949,
indicating that the defense units are generally apportioned more budgets in the second half-
year period. The mean of CONSIGNED for the first half-year group is 0.054 and for the
second half-year group is 0.051, showing that the proportion of consigned budget remains
relatively constant across the two periods at approximately 5 per cent.
66
Table 2. Descriptive statistics for continuous variables.
Group 1: First half-year Group 2: Second half-year
Variable N Mean s.d. N Mean s.d.
ER 1,019 0.756 0.224 1,017 1.534 6.751
SIZE a 1,019 0.655 2.828 1,018 0.949 3.948
CONSIGNED 1,019 0.054 0.126 1,017 0.051 0.129

a
monetary unit: a hundred million Taiwan dollars
4.2 Univariate analysis

4.2.1 Impact of the SBS on first half-year execution rate
Table 3 shows that, for the pooled sample, the execution rate for the 2002 group
(mean=79.0% is significantly higher than that for the 2001 group (mean=60.8%), at the
conventional level of significance α=0.001 (two-tailed) using both parametric paired-t
(t=16.79, p<0.001) and non-parametric Wilcoxon rank-sum tests (z=13.269, p<0.001). The
finding indicates that the first half-year execution rate increases after imposing the external
midyear review (the SBS). Thus, this result lends support to the hypothesis that the adoption
of the Semi-annual Balance Statement leads to higher budget execution rates for the first half
of the year (Ha).
We further partition the sample into six department groups (Central units, Army units,
Navy units, Air Force units, Combined Logistics Command units, and Reserve Command
units) and use the same approach to examine the relationship. As shown in panel A of Table 3,
the results are consistent with the findings based on the above pooled sample tests. Overall,
the straight comparisons between pre-SBS and post-SBS cases across departments indicate a
significant increase in budget execution rate. Taking the central units for example, the rate of
execution increases from 57.8% in 2001 (pre-SBS period) to 69.8% in 2002 (post-SBS
period), a difference significant at the 0.001 level using both parametric paired-t (t=5.899,
p<0.001) and non-parametric Wilcoxon rank-sum tests (z=5.623, p<0.001). The same
procedure is also employed to examine differences in execution rate between the 2001 group
and the 2003 group. The results, shown in panel B of Table 3, indicate that the 2003 group is
higher than the 2001 group across military departments in terms of first half-year execution
rate.
67
Table 3. Tests for differences in first half-year execution rates between Y2002 and Y2001
and between Y2003 and Y2001.
Y2002 Y2001
panel A paired-t test Wilcoxon test
（post-SBS） (pre-SBS)
Dept. N Mean s.d. Mean s.d. t p-value z p-value
Total 336 0.790 0.205 0.608 0.196 16.790 0.000 13.269 0.000
Central 93 0.698 0.199 0.578 0.184 5.899 0.000 5.623 0.000
Army 104 0.914 0.123 0.657 0.155 17.740 0.000 8.782 0.000
Navy 33 0.809 0.205 0.594 0.200 8.561 0.000 4.976 0.000
Air Force 25 0.748 0.151 0.591 0.189 4.349 0.000 3.511 0.000
CLC 55 0.681 0.255 0.536 0.266 3.733 0.000 3.620 0.000
RCMPC 26 0.870 0.077 0.712 0.125 6.721 0.000 4.381 0.000
Y2003 Y2001
panel B paired-t test Wilcoxon test
（post-SBS） (pre-SBS)
Total 334 0.873 0.178 0.608 0.196 23.454 0.000 14.700 0.000
Central 93 0.804 0.231 0.578 0.184 8.452 0.000 6.435 0.000
Army 104 0.949 0.106 0.657 0.155 20.377 0.000 8.846 0.000
Navy 32 0.849 0.176 0.598 0.202 8.631 0.000 4.862 0.000
Air Force 25 0.781 0.206 0.591 0.189 7.441 0.000 4.103 0.000
CLC a 55 0.883 0.139 0.536 0.266 10.464 0.000 6.309 0.000
RCMPC b 25 0.908 0.061 0.710 0.127 7.362 0.000 4.345 0.000
a
CLC: Combined Logistic Command units; bRCMPC: Reserve Command unit or Military Police Command unit
To provide further evidence on whether the SBS has an incremental impact on the budget
execution rate for the second adoption year, the paper compares the first half-year execution
rates for the first adoption year with those for the second year. Table 4 exhibits the results.
For the pooled sample, the execution rate for the 2003 group (mean=87.2%) is significantly
higher than that for the 2002 group (mean=78.3%), using both parametric paired-t (t=7.865,
p<0.001) and non-parametric Wilcoxon rank-sum tests (z=8.684, p<0.001). For individual
departments, the tests for the Central units, Army, Navy, CLC, and RCMPC demonstrate that
the execution rates for the second adoption year are significantly higher than those for the
first year at the 0.05 level, showing that the SBS had an incremental impact on the budget
execution rate of the second adoption year. However, the test for the Air Force shows that the
second year execution rate (mean=78.1%) is not significantly different from the first year one
(mean=74.8%), using both parametric paired-t (t=0.900, p=0.189) and non-parametric
Wilcoxon rank-sum tests (z=0.982, p=0.163).
68
Table 4. Difference in first half-year execution rate between Y2003 and Y2002.
Y2003 Y2002
paired-t test Wilcoxon test
（second year） (first year)
Total 340 0.872 0.176 0.783 0.212 7.865 0.000 8.684 0.000
Central 97 0.807 0.227 0.688 0.206 4.268 0.000 5.036 0.000
Army 104 0.949 0.106 0.914 0.123 4.246 0.000 4.517 0.000
Navy 33 0.851 0.174 0.785 0.249 1.836 0.038 1.706 0.044
Air Force 25 0.781 0.206 0.748 0.151 0.900 0.189 0.982 0.163
CLC a 55 0.883 0.139 0.681 0.255 6.126 0.000 5.061 0.000
RCMPC b 26 0.904 0.064 0.865 0.073 2.267 0.016 2.197 0.014
a
CLC: Combined Logistic Command units;
b
RCMPC: Reserve Command unit or Military Police Command unit
4.2.2 Impact of the SBS on second half-year execution rate

As stated in the hypothesis development section, the SBS is set up to reduce the
concentration of budget execution in the last months of the fiscal year. Thus, the second half-
year execution rate in the post-SBS period should be lower than that in the pre-SBS period if
the SBS works in accordance with the regulator’s expectations. To examine this issue, both
paired-t and Wilcoxon tests are used in the analysis and the results are provided in Tables 5
and 6.
The results shown in Table 5 lend support to the hypothesis that the adoption of the
Semi-annual Balance Statement leads to lower budget execution rates for the second half of
the year (Hb). The findings demonstrate that the second half-year execution rate (more than
100%) significantly decreases after the imposition of the SBS. That is, the concentration of
budget execution for the second half of the fiscal year is reduced after implementing the
external midyear review. Taking the pooled sample for example, the execution rate for the
2002 group (mean=116.7%) is significantly lower than that for the 2001 group
(mean=137.7%), using both parametric paired-t (t=-10.802, p<0.001) and non-parametric
Wilcoxon rank-sum tests (z=-12.163, p<0.001).
Table 5. Difference in second half-year execution rate between Y2002 and Y2001.
Y2002 Y2001
（post-SBS）（pre-SBS）
Total 336 1.167 0.258 1.377 0.326 -10.802 0.000 -12.163 0.000
Central 93 1.324 0.357 1.456 0.356 -2.822 0.002 -4.282 0.000
Army 104 1.052 0.098 1.280 0.175 -13.150 0.000 -8.415 0.000
Navy 33 1.106 0.164 1.273 0.274 -4.337 0.000 -3.815 0.000
Air Force 25 1.175 0.131 1.310 0.224 -2.998 0.001 -2.839 0.002
CLC a 55 1.204 0.273 1.555 0.489 -4.882 0.000 -4.717 0.000
b
RCMPC 26 1.060 0.048 1.310 0.142 -8.724 0.000 -4.457 0.000
a
CLC: Combined Logistic Command units; bRCMPC: Reserve Command unit or Military Police Command unit
69
To provide further evidence on whether the SBS has an incremental impact on the budget
execution rate of the second adoption year, the study compares execution rates for the first
adoption year with those for the second year. The results are presented in Table 6. For the
pooled sample, the execution rate for the 2003 group (mean=112.3%) is significantly lower
than that for the 2002 group (mean=116.7%), using both parametric paired-t (t=-2.560,
p=0.005) and non-parametric Wilcoxon rank-sum tests (z=-6.221, p<0.001).
For individual departments, the tests for the Army and Combined Logistic Command
units demonstrate that the second year execution rates are significantly lower than the first
year ones, using both parametric paired-t and non-parametric Wilcoxon rank-sum tests. As to
the central units, while the execution rate of the second year is lower than that of the first year,
the difference is significant only using the non-parametric Wilcoxon rank-sum test (z=-3.424,
p<0.001). The remaining tests are not significant at any conventional level.
Table 6. Difference in second half-year execution rate between Y2003 and Y2002.
Y2003 Y2002
(second year) (first year)
Total 340 1.123 0.308 1.167 0.258 -2.560 0.005 -6.221 0.000
Central 97 1.277 0.506 1.325 0.355 -0.919 0.180 -3.424 0.000
Army 104 1.022 0.067 1.052 0.098 -2.758 0.003 -4.236 0.000
Navy 33 1.065 0.103 1.087 0.135 -0.752 0.229 -0.867 0.193
Air Force 25 1.179 0.255 1.175 0.131 0.070 0.472 0.901 0.184
CLC a 55 1.071 0.163 1.204 0.273 -3.051 0.001 -3.946 0.000
RCMPC b 26 1.077 0.054 1.060 0.048 1.213 0.118 0.902 0.184
a
CLC: Combined Logistic Command units;
b
RCMPC: Reserve Command unit or Military Police Command unit
4.3 Multiple regression analysis

Considering the impact of potential confounding factors on budget execution rates, this
study repeats the above analyses on a multivariate basis and presents the results in Table 7.
The two regression models employed (Model 1: ER_1st; Model 2: ER_2nd) are both
significant at p<0.001. The adjusted-R2 for the first mode1 is 37.3 per cent and for the second
model 23.1 per cent. No high degree of multicollinearity is detected among the independent
variables with VIFs ranging from 1.183 to 2.919 for Model 1 and 1.182 to 2.836 for Model 2.
The results, after controlling for extraneous factors, confirm that the extra external
monitoring affects budget execution patterns. Specifically, the coefficient on the variable
SBS in the first model is significantly positive (t=16.330), indicating that the first half-year
execution rate in the post-SBS is higher than that in the pre-SBS period. In the second model,
the variable SBS is negatively associated with the dependent variable ER_2nd (t=-12.661),
showing that the high concentration of budget execution in the second half of the year is
reduced after implementing the SBS. In addition, this study finds that budget size (SIZE) is
negatively associated with execution rate for the both tests at the 0.001 level (two-tailed).
Such findings indicate that budget size has a negative impact on budget execution. As
expected, the results reveal that the variable CONSIGNED (ratio of consigned budget to total
budget) has incremental explanatory power beyond that provided by the experimental and
70
other control variables. The negative coefficients for the both tests may signal the presence of
agency problems in the domain of budget consignment.
Table7. Factors affecting budget execution rate.
Model 1: ER_1st Model 2: ER_2nd

Estimate t Estimate t
*** ***
constant 0.556 40.095 1.535 70.669
*** ***
SBS 0.214 16.330 -0.259 -12.661
*** ***
ARMY 0.156 10.759 -0.233 -10.183
*** ***
NAVY 0.091 4.356 -0.177 -5.343
** **
AIRFORCE 0.066 2.804 -0.107 -2.904
**
LOGISTIC 0.018 1.019 -0.073 -2.665
*** ***
RCMPC 0.135 5.966 -0.211 -5.885
* *
CONSIGNED -0.179 -2.064 -0.253 -2.037
*** ***
SIZE -0.020 -4.522 -0.022 -5.011
R2 0.379 0.238
2
Adj-R 0.373 0.231
F（p） 61.628 (0.000) 31.471 (0.000)
N 1,019 1,017
VIFs 1.183 – 2.919 1.182 – 2.836
Durbin-Watson statistic 1.973 2.135
a
*significant at the 5 percent level (two-tailed test); ** significant at the 1 percent level (two-tailed test); ***
significant at the 0.1 percent level (two-tailed test)
b
estimation model: ordinary least squares (OLS)
c
Variable Definitions: SBS=1 if the observation is taken from the post-SBS period, =0 if the observation is
taken from the pre-SBS period; ARMY=1 if an Army unit, =0 otherwise; NAVY=1 if a Navy unit, =0
otherwise; AIRFORCE=1 if an Air Force unit, =0 otherwise; LOGISTIC=1 if a Combined Logistic

Command unit, =0 otherwise; RCMPC=1 if a Reserve Command unit or Military Police Command unit, =0
otherwise; CONSIGNED=ratio of consigned budget to total budget; SIZE=budget size
Tables 8 and 9 present the impact of the SBS on the first half-year and second half-year
execution rates respectively for individual military departments. To take account of potential
individual-unit differences, the unit fixed-effects model is used in the analyses. The
explanatory powers (adj-R2s) for the tests in the first model (ER_1st) range from 21.4 per
cent (Combined Logistic Command units) to 68.1 per cent (Army units) and in the second
model (ER_2nd) from 9.6 per cent (Central units) to 61.0 per cent (Reserve Command unit or
Military Police Command units). The coefficients on the variable of interest, SBS, for all the
tests in Model 1 (ER_1st) remain positive and significant at the 0.001 level. Conversely, the
71
coefficients on the variable SBS for the tests in Model 2 (ER_2nd) remain negative and
significant at the 0.001 level except for the Central units (p<0.01). The findings provide
strong evidence that the impact of the SBS on budget execution patterns holds across
departments.
The variable SIZE remains significant for four out of the six military departments in
Model 1 and Model 2, showing that budget size is a notable determinant of budget execution
rate. However, the variable CONSIGNED is significantly associated with the execution rate
for only two military departments in Model 1 and Model 2.
Table 8. Factors affecting first half-year budget execution: Model 1: ER_1st.

Adj-R2
Dept. SBS CONSIGNED SIZE F N
(%)
*** ***
Central 5.442 -0.731 1.351 22.1 8.78 287
*** *** *** ***
Army 16.251 -5.341 -4.339 68.1 98.21 312
*** *** ***
Navy 5.017 -0.691 -6.211 41.1 14.61 101
*** *** *** ***
Air Force 4.726 -3.787 -4.427 63.7 19.45 75
*** ***
CLC 5.145 0.378 0.102 21.4 8.21 165
*** *** ***
RCMPC 6.700 0.771 -4.317 52.3 15.11 79
a
*significant at the 5 percent level (two-tailed test); ** significant at the 1 percent level (two-tailed test); ***
b
estimation method: unit fixed-effects model
c
taken from the pre-SBS period; CONSIGNED=ratio of consigned budget to total budget; SIZE=budget size
Table 9. Factors affecting second half-year budget execution: Model 2: ER_2nd.

Adj-R2
Dept. SBS CONSIGNED SIZE F N
(%)
** **
Central -2.554 -0.455 -0.621 9.6 3.11 287
*** ** *** ***
Army -16.820 -2.730 -5.501 28.1 64.15 312
*** ** *** ***
Navy -6.137 -2.445 -7.212 59.1 16.48 100
*** * *
Air Force -3.333 - 0.351 -1.853 31.3 3.01 75
*** ** ***
CLC -7.562 0.105 -2.751 37.7 12.51 165
*** ***
RCMPC -9.291 -0.034 1.103 61.0 22.61 78
a ** ***
*significant at the 5 percent level (two-tailed test); significant at the 1 percent level (two-tailed test);
b
estimation method: unit fixed-effects model
c
taken from the pre-SBS period; CONSIGNED=ratio of consigned budget to total budget; SIZE=budget size
72
5. Conclusions
Our findings, whether based on the whole sample or on individual military departments,
demonstrate that the budget execution rate increases for the first half of the fiscal year and is
reduced for the second half after introducing the independent midyear review. Based on the
findings, this study rejects the view that budget execution delays are purely caused by
uncertain or uncontrollable events. In other words, my findings lend support to the public’s
concern that agency problems play a key role in explaining budget execution delays.
Our findings also justify the regulator’s introduction of this additional monitoring into the
budgetary system. Overall, the results indicate that public budget execution suffers from
managers’ opportunism and that closer monitoring helps mitigate such opportunistic behavior.
Building on this, one might speculate whether a further increase in monitoring frequency (e.g.
quarterly budget execution review) could do an even better job of closing the gap between
actual and desired budget execution patterns. However, it may elevate cost. Thus, before
taking such a further step, the regulator needs to weigh the benefits and cost of increasing
monitoring frequency.
It should be noted that this study focuses only on the impact of the SBS on budget
execution patterns and does not relate to budget execution performance or quality. That is,
bringing actual expenditures closer to the budget amounts does not necessarily mean
improving budget execution performance. Obligating the funds apportioned in their
appropriate periods might not allow budget execution units to properly evaluate their options
and ensure that they are making the proper choice.
It is possible that, by accelerating their first half-year expenditures, the budget
expenditure units are squandering the budget or making unintended expenditures before the
mid-year assessment only in order to avoid being penalised for any execution delays. As
stated previously, the operating budget usually covers a variety of maintenance outlays (e.g.
machine maintenance, fuel) and minor capital outlays (below a specified item cost threshold)
for office machinery. In this case, Air force units, for example, might fulfill the new
regulatory requirement by flying longer schedules, replacing supplies earlier, or investing
more in preparing for their military exercises toward the end of the midyear. Undoubtedly,
some of these purchases may help meet needs in the next fiscal year. However, the relevant
appropriation law makes it illegal to use current-year money to meet the following year’s
needs. As such, whether the SBS has been successful in enhancing the quality of budget
execution presents another interesting issue that should concern policy makers. However, we
leave this issue to future research.
Finally, this study provides evidence that budget size is negatively associated with the
budget execution rate, implying that units with larger budgets face greater pressure regarding
budget execution. A possible explanation is that larger units might be assigned more complex
or more difficult tasks, resulting in a lower budget execution rate. This research also provides
some evidence supporting the view that consigned budgets contribute to lower execution
rates. Such a phenomenon raises concern about the lack of managerial accountability
assigned to trustee units, as trustee units under the present regime do not assume any
responsibility for poor budget execution. Based on this finding, we conclude that a budget
consignment system which fails to provide appropriate motivation for consignee unit
managers is inadequate and that the system design needs to take more account of behavioral
issues.
73
References
Ahmed, A.S. and Duellman, S. (2007) Accounting conservatism and board of director
characteristics: An empirical analysis. Journal of Accounting and Economics, 43(2-3),
411-437.
Ashbaugh-Skaife, H., Collins, D.W. and Lafond, R. (2006) The effects of corporate
governance on firms’ credit ratings. Journal of Accounting and Economics, 42(1-2), 203-
243.
Atkinson, A.A. and McCrindell, J.Q. (1997) Strategic performance measurement in
government. CMA Management, 71(3), 21-23.
Blondal, J.R. (2003) Budget reform in OECD member countries: Common trends. OECD
Journal on Budgeting, 2(4), 7-48.
Burgstahler, D.C., Hail, L. and Leuz. C. (2006) The importance of reporting Incentives:
Earnings management in European private and public firms. The Accounting Review,
81(5), 983-1016.
Chang, H., Ching, S., Lin, C. and Shiau, J. (1999) An exploratory study of government
budget spending pattern and its impacting factors: The case of a central government unit
in Taiwan. The International Journal of Accounting Studies, 31(1), 43-61.
Directorate-General of Budgeting, Accounting and Statistics (DGBAS) (2009a) Regulation
for Preparing the Central Government General Budget of FY 2009. Taipei.
Directorate-General of Budgeting, Accounting and Statistics (DGBAS) (2009b) Instructions
and guidelines on the preparation of the central and local government budget .Taipei.
Directorate-General of Budgeting, Accounting and Statistics (DGBAS) (2009c) Instructions
and Guidelines on the Budget Execution of Central Government Agencies. Taipei.
Dixit A., Grossman, G.M. and Helpman, E. (1997) Common agency and coordination:
general theory and application to government policy making. The Journal of Political
Economy, 105(4), 752-769.
Dougherty, M.J., Klase, K.A. and Song, S.G. (2003) Managerial necessity and the art of
creating surpluses. Public Administration Review, 63(4), 484-497.
Forrester, J.P. (1993) The rebudgeting process in state government: The case of Missouri.
American Review of Public Administration, 23(2), 155-178.
Grossman, S.J. and Hart, O.D. (1983) Implicit contracts under asymmetric information.
Quarterly Journal of Economics, 98(3), 123-156.
Hood, C. (1995) The new public management in the 1980s: Variations on a theme.
Accounting, Organizations and Society, 20(2-3), 93-109.
Jensen, M. and Meckling, W. (1976) Theory of the firm: managerial behaviour, agency costs
and ownership structure. Journal of Financial Economics, 3(4), 305-360.
Jones, L.R. and Thompson, F. (1986) Reform of budget execution control. Public Budgeting
and Finance, 6(1), 33-49.
Klase, K.A., Dougherty, M.J. and Song, S.G. (2001) Exploring within-year budget
adjustments in small to medium-size cities in West Virginia. Journal of Public Budgeting,
Accounting & Financial Management, 13(2), 245-279.
Kozar, M.J. (1993) An analysis of obligation patterns for the Department of Defense
operations and maintenance appropriations. Unpublished master’s thesis, Naval
Postgraduate School, Monterey, CA.
Kozar, M.J. and McCaffery, J.C. (1994) DOD O&M obligation patterns: Some reflections
and issues. Navy Comptroller, 5(1), 2-13.
Kravchuk, R.S. and Schack, R.W. (1996) Designing effective performance measurement
systems under the government performance and results Act of 1993. Public
Administration Review, 56(4), 348-358.
74
Lund, J. and McLuckie, J. (2007) Labor organization financial transparency and

accountability: A comparative analysis. Labor Law Journal, 58(4), 251-266.
McCaffery, J.C. and Jones, L.R. (2004) Budgeting and Financial Management for National
Defense. CA: Information Age Publishing.
McCaffery, J.C. and Mutty, J.E. (1999) The hidden process of budgeting: Execution. Journal
of Public Budgeting, 11(2), 233-257.
Osborne, D. and Gaebler, T. (1993) Reinventing Government: How the Entrepreneurial Spirit
is Transforming the Public Sector, from Schoolhouse to Statehouse, City Hall to the
Pentagon. MA: Addison-Wesley.
Pitsvada, B. (1983) Flexibility in federal budget execution. Public Budgeting and Finance,
3(2), 83-101.
Sharma, A. (1997) Professional as agent: Knowledge asymmetry in agency exchange. The
Academy of Management Review, 22(3), 758-798.
75
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Chen and Wang - Assymetric and Diversified 2010 PDF

Enviado por

Dados do documento

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Chen and Wang - Assymetric and Diversified 2010 PDF

Enviado por

Direitos autorais:

Formatos disponíveis

Asia Pacific Management Review 17(1) (2012) 37-58

International Evidence on Industrial Diversification and Asymmetric

Li-Ling Chena,, Andrew Ming-Long Wang b

This paper examines the effect of industrial diversification on asymmetric information

Keywords: Entrenchment effect, alignment effect, corporate ownership structure, corporate

Diversification strategy results in several problems regarding corporate governance. One

H2: The marginal effect of corporate diversification on asymmetric information varies

3. Sample selection and empirical design

Table 1. Distribution of sample.

Panel B：Distribution of Year

3.1 Diversification measure

The adverse-selection component (ASC) for each stock is estimated as follows:

To ensure that we have an unbroken series of continuously compounded returns available

own 0 _ 10  total ownership , if total ownership  10 %,

In addition, the impact of ownership concentration on the asymmetric information of

4.1 Descriptive statistics

Table 2-2. Correlations of the variables.

Ln(TA) 1 -0.01 0.30 0.35 -0.37 -0.08 0.86

4.2 Regressions for full sample

Table 4. The analysis of forecast accuracy across ownership structure.

Table 6. The analysis of earnings announcement abnormal returns across ownership

4.3.4 The regressions’ results of adverse -selection component of bid-ask spread

4.4 The additional test

This study examines the effect of corporate diversification on asymmetric information

Does Monitoring Frequency Affect Budget Execution Patterns?

Keywords: Budget execution, monitoring frequency, execution pattern, behavior

2. Literature review and hypothesis development

2.1 Taiwan’s budgetary system

government employees to attend committee meetings, to present oral explanations concerning

We focus on non-intelligence units since budget data of intelligence agencies are

Table 1. Temporal distribution of sample.

Y2001 Y2002 Y2003 Total

3.2 Empirical models

4.1 Descriptive statistics

Table 2. Descriptive statistics for continuous variables.

Group 1: First half-year Group 2: Second half-year

Variable N Mean s.d. N Mean s.d.

ER 1,019 0.756 0.224 1,017 1.534 6.751

SIZE a 1,019 0.655 2.828 1,018 0.949 3.948

CONSIGNED 1,019 0.054 0.126 1,017 0.051 0.129

4.2 Univariate analysis

4.2.2 Impact of the SBS on second half-year execution rate

4.3 Multiple regression analysis

Table7. Factors affecting budget execution rate.

Model 1: ER_1st Model 2: ER_2nd

otherwise; AIRFORCE=1 if an Air Force unit, =0 otherwise; LOGISTIC=1 if a Combined Logistic

Table 8. Factors affecting first half-year budget execution: Model 1: ER_1st.

Table 9. Factors affecting second half-year budget execution: Model 2: ER_2nd.

Lund, J. and McLuckie, J. (2007) Labor organization financial transparency and

Você também pode gostar