The Fundamental Agency Problem: Ownership, Monitoring, and Voluntary Disclosure

Abstract

Combining databases with unique strengths I show that stray firms, i.e. those lacking a controlling owner, have lower disclosure in financial reports. This finding illustrates managers’ preference to withhold information (“the fundamental agency problem”). I contribute to the literature by showing that, while monitoring by blockholders initially increases disclosure, disclosure decreases at high levels of block ownership. At high levels blockholders appear to lose interest in public disclosure as their access to information is virtually guaranteed. Moreover, I report findings on the impact of institutional, foreign, under-diversified, and controlling minority-owners, concluding that ownership structure has major implications for voluntary disclosure.

Keywords: Voluntary disclosure, ownership, monitoring, agency costs, block holder

JEL Classification: G30, G32