1. Introduction
Financial fraud, such as that committed by Tyco, Enron, and WorldCom, has become prevalent. Some internal managers or shareholders take advantage of their own business operations out of self-interest, leaving investors with insufficient information in a relatively weak position. Detecting fraud that causes loss to investors and corporate decline is difficult [
1,
2,
3].
Therefore, in addition to a greater amount of attention paid by scholars and people practicing business to the matter of information disclosure, financial supervision agencies in various countries have developed guidelines for measuring transparency when encouraging enterprises to improve information disclosure. In 2003, the Taiwan Stock Exchange Corporation (TSEC) entrusted the Securities and Futures Institute (SFI) with the task of improving the information disclosure system to ensure a reduction in information asymmetry between insiders and outsiders on all companies listed in the TSEC. The purpose of this information disclosure system is to plan and design evaluation indicators that meet the needs of the information disclosure and transparency ranking system (IDTRS). The investment publication is expected to be capable of easily determining the degree of corporate information asymmetry by publishing evaluation grades for listed companies annually.
Differences in information disclosure often imply that various agency problems [
4,
5], stock liquidity [
6,
7], corporate capital costs [
8,
9], and earnings quality [
10] may influence enterprise value. Moreover, the evaluation level naturally becomes an auxiliary reference for investor decisions.
The relationship between information disclosure quality and corporate value is inextricable. Improving the integrity of information disclosure can improve the quality of information disclosure, reduce corporate capital costs, and increase shareholder wealth [
11]. This effectively repairs damage caused by information asymmetry between shareholders and operators [
12,
13]; moreover, it can mitigate the effect of excessive executive compensation on company value and enhance corporate value [
14]. Merton [
15] indicated that the complete disclosure of information helps investors identify with the company and attract new investors, which can reduce the cost of capital and increase the value of the company. Diamond and Verrecchia [
7] also discovered that incensement in response to information disclosure can reduce information asymmetry and transaction costs, improve liquidity, and reduce corporate capital costs [
16,
17,
18]. Klapper and Love [
19] explored 14 emerging markets and discovered that more effective corporate governance corresponds to favorable operational performance and corporate value. Bai et al. [
20], Black et al. [
21], and Braga-Alves and Shastri [
22] have examined corporate governance in China, the Soviet Union, Mexico, and Brazil, respectively, and its relationship with company value, and they have reached the same conclusion as the aforementioned study. Ho et al. [
23] applied the data of listed companies in Taiwan for the period from 2005 to 2013 to demonstrate that product market competition is negatively correlated with corporate value and that when product market competition is weak, information disclosure is more conducive to company value.
According to the aforementioned research, information disclosure can effectively reduce information asymmetry, reduce company costs, and enhance company value. However, because information disclosure also has external costs, more disclosure is not always better. Excessive disclosure of information may provide competitors with a better understanding of the company’s strategy, profitability, and innovation level as well as weaken competitive advantages [
24]. Bloomfield and Fischer [
25] explored the effects of information disclosure on capital costs, reporting that corporate capital costs increase when firms believe that investors respond to noncritical disclosures.
Product market competition is often considered an external mechanism that affects information disclosure [
23]. Information disclosure is endogenous but also influenced by the market competition environment. One view holds that industries with low levels of competition tend to have excess returns and therefore low levels of information disclosure. Information disclosure can also help sellers to distinguish themselves from competitors. However, the fierce competition in the product market is not always beneficial. Other studies have conducted a relatively comprehensive exploration of market competition level by measuring the degree of market product differentiation; they have discovered that higher levels of competition correspond to lower likelihood of high-quality information disclosure. Research has also demonstrated that if the cost of disclosure is high, companies will disclose higher-quality information. When the market itself is more competitive and disclosure cost is higher, competitors will tend to disclose higher-quality information to mitigate high costs. When the degree of competition in the market is not high, competition will always lead to the disclosure of low-quality information regardless of the level of cost.
The degree of mispricing affects the choice of financing method. Baker et al. [
26] indicated that when companies rely heavily on equity financing, the effect of mispricing on equity financing is more obvious. However, even if external financing is not required, mispricing may directly affect company investments. The degree of mispricing is affected by many factors [
27]. Sloan [
28] proposed that investors do not understand that inherent future earnings information is the primary cause of mispricing. Moreover, because the quality of public information remains at the same level, an increased amount of information does not necessarily correspond to a reasonable equity valuation. Compliance with regulations improves company information environments, reduces mispricing, and increases stock market efficiency. Furthermore, policymakers should consider the quality of information provided when attempting to increase capital market efficiency by forcing more disclosures.
Emerging markets possess the characteristics of rapid economic development and remarkable market potential. However, their market economic system remains in a stage of gradual improvement, their external supervision mechanism is not perfect, their information disclosure mechanism is incomplete, and their internal control system of listed companies is inadequate. Investors are more likely to be in an unfavorable position when investing with limited information acquisition and professional knowledge. Therefore, improving the level of investor protection and exploring the relationship between information disclosure and degree of corporate value is necessary to enable investors to more accurately judge investment value. Some scholars have turned their attention away from mature markets to investigate whether emerging markets are subject to the same phenomenon [
29].
Investor relations indicators provided by the Association for Investment Management and Research (AIMR) and the Center for International Financial Analysis and Research (CIFAR) can be used as a measure of information disclosure, in addition to other variables used as information disclosure agents [
30,
31]. However, the AIMR score is not available after 1996, and the CIFAR indicator system does not include Taiwan. We use the SFI information disclosure ranking (IDR) as a measure of information disclosure quality and expand the scope of application of SFI IDRs. By contrast, SFI forms a research team composed of experts from independent parties—consisting of the accounting and finance profession, academic researchers, in-house research staff, and IT personnel—using 114 measures to evaluate the information quality of all listed firms, except for some firms with inadequate data or under regulatory investigation. Therefore, the disclosure scores are based on the same set of information criteria and are not skewed to large firms and variation in accounting standards. The research results are highly relevant to Taiwan’s actual situation and possess certain theoretical value.
We show our main results and contributions. First, using a relatively large sample, this study provides further support for the effectiveness of the information disclosure ranking in reducing information asymmetry between enterprises and investors and reflects the degree of mispricing in emerging markets. Our results show that information disclosure ranking, industry production market competition and their interaction did influence the mispricing of Taiwanese firms between 2005 and 2014. Second, we find unique data that shows the SFI’s measurements for information disclosure ranking are negatively associated with mispricing. It suggests that higher levels of information disclosure rankings (transparency) reduce agency problems, thus leading to lower mispricing. Third, we find that the benefits of increased information disclosure rankings levels are significant only for firms that face strong competition in the product market, compared to other firms in less competitive industries. Finally, we solve the endogeneity problem to improve the degree of mispricing, information disclosure may improve the information disclosure score as a result of decreased mispricing. In summary, the primary purpose of the evaluation system is to provide investors with a convenient pipeline for knowing the level of information disclosure of a company, thereby helping investors to make more informed investment decisions. However, the implementation of the system also indirectly forces enterprises to improve the quality of their information disclosure. The information disclosure evaluation system reduces information asymmetry between enterprises and investors and reflects the degree of mispricing. We argue that information disclosure rankings could facilitate managers’ forward thinking, and firms with better information disclosure rankings or corporate social responsibility not only aim to reduce short-term mispricing but also focus on long-term sustainable development [
32,
33,
34,
35,
36,
37,
38,
39]. Moreover, information disclosure rankings firms are found to be more ethical [
23,
40], and managers are encouraged to undertake actions that boost long-term firm value, thus resulting in less mispricing.
This paper is structured as follows: the first section introduces the research background and literature review, the second section presents the hypothesis development, and the third section explains the sample and the definition of variables required in this study. The fourth section provides an analysis of the empirical results, and the final section presents conclusions drawn on the basis of the empirical findings of this study.
5. Conclusions
After Enron acquired a substantial debt risk, WorldCom, Tyco, and Merck were also involved in accounting scandals that not only caused an increase in the stock market margin but also reduced investor confidence. This study uses the IDR indicators established by the SFI to divide the IDR score into seven points. During the sample period of 2005 to 2014, we obtain the data of 10,686 listed companies. This study reveals that the information disclosure work evaluation system promoted by the SFI and IDR significantly affects the quality and amount of information disclosed by the evaluated enterprises. Moreover, the empirical results of this study reveal that the transparency indicator of information disclosure helps to reduce the degree of mispricing. Considering the disadvantages of low liquidity and high capital costs that may accompany low information transparency, companies focusing on information disclosure will eventually reduce their degree of mispricing.
From the perspective of the external environment, the size and transparency of the monopolistic industry will help reduce the mispricing of enterprise value. Additionally, this study provides further evidence that industry product market competition is separated into three groups. Negative relationships between IDR and mispricing are only observed in competitive industries because of their relatively high financial risk and default probability, which prompts investors to consider information transparency. If a firm increases their information transparency, investors will have more interest and confidence in investing in the firm, leading to reduced mispricing. This evidence supports the notion that IDRs effectively reduce mispricing in competitive industries. Policies related to the promotion of information disclosure outside of the SFI can also be affirmed using our results. Moreover, information disclosure ranking firms are found to be more ethical, trustworthy, and honest, and managers are encouraged to undertake actions that boost long-term sustainable development, thus resulting in less mispricing.