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Transparency and Corporate Governance

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  • Benjamin E. Hermalin
  • Michael S. Weisbach

Abstract

An objective of many proposed corporate governance reforms is increased transparency. This goal has been relatively uncontroversial, as most observers believe increased transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to increased transparency, leading to an optimum level beyond which increasing transparency lowers profits. This result holds even when there is no direct cost of increasing transparency and no issue of revealing information to regulators or product-market rivals. We show that reforms that seek to increase transparency can reduce firm profits, raise executive compensation, and inefficiently increase the rate of CEO turnover. We further consider the possibility that executives will take actions to distort information. We show that executives could have incentives, due to career concerns, to increase transparency and that increases in penalties for distorting information can be profit reducing.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12875.

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Date of creation: Jan 2007
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Handle: RePEc:nbr:nberwo:12875

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  1. Benjamin E. Hermalin & Michael S. Weisbach, 1996. "Endogenously Chosen Boards of Directors and Their Monitoring of the CEO," Working Papers, University of California at Berkeley, Haas School of Business _004, University of California at Berkeley, Haas School of Business.
  2. Steven N. Kaplan & Bernadette Minton, 2006. "How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs," NBER Working Papers 12465, National Bureau of Economic Research, Inc.
  3. Benjamin E. Hermalin., 1991. "The Effects of Competition on Executive Behavior," Economics Working Papers, University of California at Berkeley 91-182, University of California at Berkeley.
  4. Wagenhofer, Alfred, 1990. "Voluntary disclosure with a strategic opponent," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 12(4), pages 341-363, March.
  5. Bengt Holmstrom, 1999. "Managerial Incentive Problems: A Dynamic Perspective," NBER Working Papers 6875, National Bureau of Economic Research, Inc.
  6. Diamond, Douglas W & Verrecchia, Robert E, 1991. " Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1325-59, September.
  7. Inderst, Roman & Mueller, Holger M, 2005. "Keeping the Board in the Dark: CEO Compensation and Entrenchment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5315, C.E.P.R. Discussion Papers.
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Cited by:
  1. Stulze, Rene M., 2008. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," Working Paper Series, Ohio State University, Charles A. Dice Center for Research in Financial Economics 2008-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. David Kemme, 2012. "Soverign Wealth Fund Issues and the National Fund(s) of Kazakhstan," William Davidson Institute Working Papers Series wp1036, William Davidson Institute at the University of Michigan.
  3. Westman, Hanna, 2011. "The impact of management and board ownership on profitability in banks with different strategies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(12), pages 3300-3318.
  4. René M. Stulz, 2008. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," NBER Working Papers 14218, National Bureau of Economic Research, Inc.
  5. Jong-Seo Choi & Young-Min Kwak & Chongwoo Choe, 2012. "Earnings Management Surrounding CEO Turnover: Evidence from Korea," Development Research Unit Working Paper Series, Monash University, Department of Economics 35-12, Monash University, Department of Economics.
  6. Peter Egger & Christian Keuschnigg & Hannes Winner, 2008. "Incorporation and Taxation: Theory and Firm-level Evidence," University of St. Gallen Department of Economics working paper series 2008, Department of Economics, University of St. Gallen 2008-20, Department of Economics, University of St. Gallen.
  7. Joshua Aizenman & Reuven Glick, 2008. "Sovereign wealth funds: stylized facts about their determinants and governance," Working Paper Series, Federal Reserve Bank of San Francisco 2008-33, Federal Reserve Bank of San Francisco.
  8. Andrade, Sandro C. & Bernile, Gennaro & Hood, Frederick M., 2014. "SOX, corporate transparency, and the cost of debt," Journal of Banking & Finance, Elsevier, Elsevier, vol. 38(C), pages 145-165.
  9. Battalio, Robert & Hatch, Brian & Loughran, Tim, 2011. "Who benefited from the disclosure mandates of the 1964 Securities Acts Amendments?," Journal of Corporate Finance, Elsevier, Elsevier, vol. 17(4), pages 1047-1063, September.
  10. Bhagat, Sanjai & Bolton, Brian, 2008. "Corporate governance and firm performance," Journal of Corporate Finance, Elsevier, Elsevier, vol. 14(3), pages 257-273, June.
  11. Andres Almazan & Javier Suarez & Sheridan Titman, 2007. "Firms' Stakeholders and the Costs of Transparency," NBER Working Papers 13647, National Bureau of Economic Research, Inc.
  12. Christian Keuschnigg & Peter Egger & Hannes Winner, 2010. "A Theory of Taxation and Incorporation," University of St. Gallen Department of Economics working paper series 2010, Department of Economics, University of St. Gallen 2010-25, Department of Economics, University of St. Gallen.

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