Information Disclosure and Corporate Governance

47 Pages Posted: 10 Jan 2008 Last revised: 2 Feb 2011

See all articles by Benjamin E. Hermalin

Benjamin E. Hermalin

University of California, Berkeley

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: January 30, 2011

Abstract

In public-policy discussions about corporate disclosure, more is typically judged 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 other costs for shareholders, including increased executive compensation. Consequently, there can exist a point beyond which additional disclosure decreases firm value. We further show that larger firms will tend to adopt stricter disclosure rules than smaller firms, ceteris paribus. Firms with better disclosure will tend, all else equal, to employ more able management. We show that governance reforms that have imposed greater disclosure could, in part, explain recent increases in both ceo compensation and ceo turnover rates.

Keywords: Corporate Governance, Corporate Disclosure

JEL Classification: G30, L20, D82, D83, M42

Suggested Citation

Hermalin, Benjamin E. and Weisbach, Michael S., Information Disclosure and Corporate Governance (January 30, 2011). Fisher College of Business Working Paper No. 2008-03-016; Journal of Finance, Forthcoming; Charles A. Dice Center Working Paper No. 2008-17. Available at SSRN: https://ssrn.com/abstract=1082513

Benjamin E. Hermalin (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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