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Information Disclosure and Corporate Governance

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  • BENJAMIN E. HERMALIN
  • MICHAEL S. WEISBACH

Abstract

In public-policy discussions about corporate disclosure, more is typically judged to be better than less. In particular, better disclosure is seen as a way to reduce the agency problems that plague firms. We show that this view is incomplete. In particular, our theoretical analysis shows that increased disclosure is a two-edged sword: More information permits principals to make better decisions; but it can, itself, generate additional agency problems and consequent costs to shareholders. Disclosure imposes risks on managers that they seek to ameliorate by distorting their actions in ways that are harmful to shareholders. Because the direct benefits of better disclosure accrue to the shareholders, while the direct costs accrue to management, greater disclosure will also lead to greater executive compensation, regardless of how bargaining power is divided between shareholders and management.

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File URL: http://hdl.handle.net/10.1111/j.1540-6261.2011.01710.x
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Bibliographic Info

Article provided by American Finance Association in its journal Journal of Finance.

Volume (Year): 67 (2012)
Issue (Month): 1 (02)
Pages: 195-234

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Handle: RePEc:bla:jfinan:v:67:y:2012:i:1:p:195-234

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Citations

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Cited by:
  1. Datta, Sudip & Iskandar-Datta, Mai & Singh, Vivek, 2013. "Product market power, industry structure, and corporate earnings management," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 3273-3285.
  2. Alex Edmans & Mirko Heinle & Chong Huang, 2013. "The Real Costs of Disclosure," NBER Working Papers 19420, National Bureau of Economic Research, Inc.
  3. Andriosopoulos, Dimitris & Andriosopoulos, Kostas & Hoque, Hafiz, 2013. "Information disclosure, CEO overconfidence, and share buyback completion rates," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5486-5499.
  4. Pablo Ruiz-Verdú & Ravi Singh, 2014. "Board Independence, CEO Pay, and Camouflaged Compensation," Business Economics Working Papers wb140704, Universidad Carlos III, Departamento de Economía de la Empresa.
  5. Eisfeldt, Andrea & Kuhnen, Camelia M., 2010. "CEO turnover in a competitive assignment framework," MPRA Paper 22367, University Library of Munich, Germany.
  6. Citci, Haluk & Inci, Eren, 2012. "The Masquerade Ball of the CEOs and the Mask of Excessive Risk," MPRA Paper 35979, University Library of Munich, Germany.
  7. Kurt A. Desender & Mircea Epure, 2013. "Corporate governance and corporate social performance," Economics Working Papers 1398, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2014.
  8. Renée Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2008. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," NBER Working Papers 14486, National Bureau of Economic Research, Inc.
  9. Garay, Urbi & González, Maximiliano & Guzmán, Alexander & Trujillo, María Andrea, 2013. "Internet-based corporate disclosure and market value: Evidence from Latin America," Emerging Markets Review, Elsevier, vol. 17(C), pages 150-168.
  10. Forssbaeck, Jens & Oxel, Lars, 2014. "The Multi-faceted Concept of Transparency," Working Paper Series 1013, Research Institute of Industrial Economics.

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