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Information Asymmetry and Corporate Governance

Jie Cai

Drexel University

Yiming Qian

University of Iowa - Department of Finance

Yixin Liu

University of New Hampshire

June 30, 2009

Drexel College of Business Research Paper No. 2008-02

We examine the impact of a firm's asymmetric information on its choice of three mechanisms of corporate governance: the intensity of board monitoring, the exposure to market discipline, and CEO pay-for-performance sensitivity. We find that firms facing greater asymmetric information tend to use less intensive board monitoring but rely more on market discipline and CEO incentive alignment. These results are consistent with the monitoring cost hypothesis. These results also support the notion that firms endogenously and optimally choose governance. Consistent with this viewpoint, we find that firm performance is not related to governance for the overall sample. However, firms suffer poor performance when the Sarbanes-Oxley Act and related regulations force them to deviate from equilibrium. Our evidence therefore suggests that regulators should use caution when imposing uniform corporate governance requirements on all firms.

Number of Pages in PDF File: 38

Keywords: corporate governance, asymmetric information, board monitoring, pay-for performance, anti-takeover provisions

JEL Classification: D82, J33, G30, G32, G38

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Date posted: March 21, 2008 ; Last revised: June 30, 2009

Suggested Citation

Cai, Jie and Qian, Yiming and Liu, Yixin, Information Asymmetry and Corporate Governance (June 30, 2009). Drexel College of Business Research Paper No. 2008-02. Available at SSRN: http://ssrn.com/abstract=1082589 or http://dx.doi.org/10.2139/ssrn.1082589

Contact Information

Jie Cai (Contact Author)
Drexel University ( email )
LeBow College of Business
Philadelphia, PA 19104
United States
215-895-1755 (Phone)
215-895-2955 (Fax)
HOME PAGE: http://faculty.lebow.drexel.edu/CaiJ/
Yiming Qian
University of Iowa - Department of Finance ( email )
S382 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0934 (Phone)
319-335-3690 (Fax)
Yixin Liu
University of New Hampshire ( email )
Durham, NH 03824
United States
603-862-3357 (Phone)
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