Edited by Craig C. Julian, Zafar U. Ahmed and Junqian Xu
Chapter 12: Corporate information disclosure internalities in China's stock market
In a directed economy, internality and externality are two important concepts which are used to analyze market failure and government regulations. Externality, which is known as the Coase Theorem (Coase 1960), refers to the gain or loss that an economic body brings to others without trading. However, internality, first introduced by American economist Spulber (1989), refers to the hidden benefit or cost burden of traders, which is rarely known by people. Just like externality, internality consists of positive internality and negative internality. The former refers to the hidden benefit in the contract, and the latter refers to the cost which is not displayed in the contract. According to the definition, internality is a kind of market failure caused by incomplete information and asymmetric information in microeconomics. Internality can be clearly found in the information disclosure of listed companies. On the one hand, companies get the money from the investors; on the other hand, the investors acquire the residual claim and the residual rights of control. The former is temporary, whereas the latter will take a fairly long time. It takes a long time for shareholders to exert their rights, which is easily influenced by the quality of information. As a result, the company managers, who are predominant in information collection and dissemination, will use the undefined clause to collect the profits owing to the influences of information asymmetry.
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