Information Disclosure and Corporate Governance

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.