Sense Making in Corporate Governance: A Multilayered Model for Information Asymmetries between Investors and Executives
61 Pages Posted: 21 Dec 2013
Date Written: December 20, 2013
In studies of corporate governance by default, information asymmetry is assumed, based on the principle-agent theory, between investors and executives, and also by default it is assumed that executives have superior information over investors. In this paper I apply the more rich theory of information from cybernetics, compared to the mathematical theory to this assumed information asymmetry in combination with the theory of decision making, especially with respect to producing eidetic information. The quality of eidetic information turns out to be more critical as is the management or pragmatic information, with respect to the longer-term success of a firm and subsequently its value over the longer term. Due to e.g. psychological phenomena like dominant logic or belief conservation, executives not always produce good quality eidetic information and subsequently decide poor strategies. More in general it can be concluded that the assumption of information asymmetry needs to be understood per type of information and per each phase in decision-making. The resulting model provides a more precise insight in what value investors and non-executives may contribute to improve the quality of the information in a system of corporate governance and thus its effectiveness.
Keywords: Corporate governance, information asymmetry, information theory, decision theory, agency theory, real option theory, investment projects
JEL Classification: G14, G24, G30, G32
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