2.1. Sustainability Reporting and Information Asymmetry
Information asymmetry is a condition in which one party in a relationship has better access to information than the other party [
31]. Accounting and finance studies have mainly discussed two types of IA. The first occurs as a result of the separation between managers (the “agents”) and investors (the “principals”) [
8,
9,
32], whereas the second type arises between the investors themselves (i.e., informed and less-informed investors, who are a group of majority and minority shareholders) [
33]. Although the latter type has attracted less attention in the literature, the following sections deal with both types of IA interchangeably, arguing that corporate disclosures, namely sustainability reporting, influence the information asymmetry problem. The second part of the discussion is directed towards the role of family-controlled firms, which are categorised as informed investors, in moderating the sustainability reporting–IA nexus.
The opportunities and challenges of IA are fundamentally related to several theories, including agency theory [
32]. This theory, in its classical form, is based on the principal–agent relationship, in which managers (“agents”) are appointed by a firm to act on behalf of shareholders (“principals”) [
32]. This kind of separation gives managers the privilege of enjoying better access to information about the firm’s prospects, which they exploit in projects that serve their interests [
32]; this constitutes a moral hazard problem. Such conflicts may lead to a collapse in the performance of the capital market, meaning that if shareholders cannot distinguish between “good” and “bad” business actions, managers committing “bad” actions will try to claim that they are “good” actions, and shareholders will value both “bad” and “good” actions at the same level. Therefore, the capital market will undervalue some “good” actions and overvalue others that are “bad” based on the information available to the managers [
14], constituting an adverse selection problem [
9,
34]. Diamond and Verrecchia [
8] and Leuz and Verrecchia [
34] argue that IA can create such costs as a consequence of adverse selection, because information gathering by investors takes time and can therefore be expensive, raising the opportunity costs.
One of the key measures to narrow the information gap that might exist as a result of the separation between ownership and control is to keep investors informed by revealing information to the public in the form of corporate disclosures [
8,
35]. Logically, when investors have more information about a company’s activities, they will be able to value the available alternatives and make accurate decisions [
36]. In this vein, Diamond and Verrecchia [
8] argue that company disclosures can help reduce information differences between managers and shareholders, thus increasing liquidity in the market, reducing the volatility of stock prices, and decreasing companies’ equity capital costs e.g., [
9,
10,
11,
12].
Information disclosures by firms can be issued using a set of communication reports, which may be mandatory, in the form of regulated reports and other periodic regulatory filings, or voluntary, meaning that they are not required by law or other regulatory bodies [
14]. Another essential distinction which may be involved within mandatory and voluntary disclosures is the distinction between financial and non-financial disclosures, with the latter referring to social and environmental disclosures. Generally, financial disclosures are more likely to be mandatory, whereas non-financial disclosures tend to be less disciplined. In this vein, the theoretical literature shows that both voluntary and mandatory disclosures reduce information asymmetry [
37]. However, there is little empirical evidence that proves whether, and in what way, sustainability reporting (an example of a non-financial disclosure) influences IA [
3,
6,
15,
16]. While the theoretical literature shows that both types of disclosure could help in reducing IA, this study emphasises information related to sustainability reporting, an area of business activity that is becoming increasingly attractive for market participants [
15,
38,
39].
Theoretically, the relationship between sustainability reporting and information asymmetry can be explained from the perspective of stakeholder theory, according to which managers have a fiduciary duty towards all stakeholders instead of maintaining exclusive relationships with them [
40] (stakeholders are any identifiable individual or group who can affect or be affected by the achievements of a firm’s objectives (Freeman and Reed, 1983)). Meeting the expectations of different stakeholder groups by actively committing to CSR can help to improve a company’s reputation [
41]. Therefore, it has been argued that reputation building is linked with higher-quality earnings reporting [
42], which ultimately reduces IA [
43]. Previous studies argue that CSR is positively related to earnings reporting quality, suggesting that it creates an atmosphere that inspires managers to adopt a public-responsibility-oriented mentality, which subsequently encourages the issuance of more transparent financial reporting and meets stakeholder expectations [
44,
45,
46]. Clarkson, Li [
47] found that socially responsible firms tend to disclose more information to the public in order to build their reputation and inform stakeholders about their social responsibility [
3,
48]. In the same vein, when a company has built up a certain reputation (via sustainability reporting), it can improve its financial performance by attracting more qualified employees, boosting customer loyalty, and gaining considerable attention from analysts [
49]—the so-called business case for sustainability [
50].
Studies that have empirically examined the relationship between sustainability reporting and IA have generally found evidence of a negative relationship. For example, Cho, Lee [
15] investigated the link between CSR performance and information asymmetry, relying on a bid–ask spread (the amount by which the ask price exceeds the bid price for an asset in the market) as a proxy for IA and considering a sample of the US stock market over the period 2003–2009. Their main finding was that both negative and positive CSR performance are negatively related to the bid–ask spread. More specifically, a negative CSR performance tends to be more effective than a positive performance in mitigating IA. This negative relationship was also observed by the authors of [
6], who tested whether sustainability reporting reduced the bid–ask spread in a sample of 391 Australian non-financial companies during the period 2004–2014. This negative association was reported to be more prominent in larger companies and those that possessed stronger market power. Cui, Jo [
16] recently provided evidence for the relationship between sustainability reporting and IA using a sample of US non-financial companies during the period 1991–2010. IA was measured using three different proxies: the dispersion of analysts’ forecasts, the price impact measure, and the bid–ask spread. After employing two-stage least squares (2SLS) and generalised method of moments (GMM) models, they found that CSR was negatively related to IA. Dhaliwal, Radhakrishnan [
3] further examined the impact of CSR on analysts’ forecast accuracy. They found that issuing stand-alone CSR reports was positively related to analysts’ forecast accuracy, implying that sustainability reporting reduces IA (a negative relationship). In this respect, we propose the following hypothesis:
Hypothesis 1 (H1). Sustainability reporting is negatively related to information asymmetry.
2.2. The Influence of Firm Ownership on Information Asymmetry
While the separation between agents and principals is argued to be one of the key factors that lead to IA [
14], investors are heterogeneous with regard to the level of information they possess or have access to. For instance, those who hold the majority of shares could gain better access to information than minority shareholders [
51]. In such a case, there exist informed and less-informed investors. Family-controlled firms, which are characterised by majority ownership, are seen to be a common case of majority and minority shareholders. Research on corporate ownership e.g., [
26,
28,
52] shows that family ownership is the most prevalent ownership type around the world. Several studies have documented the fact that family-owned companies represent over one third of large US listed companies [
51,
53] and more than 55 percent of smaller companies. The percentage is also high in Europe, at around 44.29 percent in 13 Western European countries [
28,
53].
This concentration provides family owners with the privilege of holding higher managerial positions and allows them to engage in day-to-day activities, offering them better access to information. Accordingly, the gatekeeper role that family-controlled firms play over management behaviour could result in better monitoring, thus mitigating the classical form of the agency problem (the “principal-agent problem”) and diminishing the IA that stems from the separation between management and ownership [
54,
55,
56]. Previous studies have addressed agency problems from different perspectives. A conflict of interests can arise between: shareholders (principals) and managers (agents)—type-I agency conflict (Jensen and Meckling, 1976); majority and minority shareholders—type-II agency conflict (Morck, Shleifer, and Vishny, 1989); and shareholders and stakeholders—type-III agency conflict. A commercial entity dominated by an ownership concentration corresponds to type-II agency conflict. One issue of concern is that the majority ownership uses its power and privileges in an opportunistic way to further its own interests at the expense of the interests of the minority. Since family-controlled firms possess more information than other investors and have the opportunity to be involved in management, a type-II agency problem between the family as the majority investor and the other minority investors may arise [
57,
58].
Based on the various impacts of informed investors mentioned above, it is possible that the influence of family-controlled firms on the relationship between sustainability reporting and IA could help to reduce overall IA, implying that the role of such firms is not only to monitor management behaviour, but also to take the initiative in being more active and involved in sustainability reporting activities. On the other hand, family-controlled firms could increase the information gap by taking advantage of the private information they have as major shareholders, meaning that the relationship between sustainability reporting and IA will be positive. Cho, Lee [
15] describe the first theory as the information efficiency effect and the second as the adverse selection effect.
The information efficiency effect theory argues that the private information possessed by the majority of family-controlled firms allows them to actively participate in the market [
15]. Therefore, their trading will help to disseminate more information to the market and encourage other “less-informed” investors to imitate their behaviour. Consequently, stock market liquidity will increase and the bid–ask spread will be reduced [
59,
60]. According to the information efficiency theory, family-controlled firms will improve market liquidity by conducting sustainability reporting, publishing their information in a timely and detailed manner. Based on this reasoning, it is argued that the higher the proportion of family stock ownership, the stronger the negative relationship between sustainability reporting and IA.
Additionally, several previous studies have argued that the adverse selection of informed investors could increase information differences between informed and less-informed investors and thus widen the bid–ask spread [
15]. Informed investors, with their information advantage, may disguise their trading through small transactions in order to maximise their profit by buying at lower ask prices and selling at higher bid prices. This method of trading can be sustained until any private information is fully disclosed to the public, or as long as the profit from trading against less-informed investors is adequate to cover any cost of information acquisition [
61]. Moreover, Easley and O’hara [
30] suggest that informed investors can adjust their portfolios using the private information they possess, whereas less-informed investors cannot, due to their lack of private information; this will increase the IA by raising the risks faced by less-informed investors, and, consequently, the bid–ask spread will be widened. Accordingly, a higher proportion of family ownership is expected to attenuate any reduction in IA attributed to sustainability reporting.
Hypothesis 2 (H2). Family-controlled firms moderate the relationship between sustainability reporting and information asymmetry.