The Complementarity between Signal Informativeness and Monitoring

47 Pages Posted: 9 Feb 2019 Last revised: 15 Jul 2022

See all articles by Pierre Chaigneau

Pierre Chaigneau

Queen's University; Queen’s University

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics

Date Written: July 2022

Abstract

A firm that must decide whether to retain or terminate a manager can rely on several sources of information to assess managerial ability. When it relies on a performance signal and monitoring, we show that a more informative signal can surprisingly increase the value of monitoring. Then, signal precision and monitoring are complements. This happens if a more precise information system makes some signals more negative indicators of managerial ability that still do not trigger termination. When the turnover cost is high enough and the manager is more entrenched after a positive performance, an increase in signal precision increases expected monitoring. In firms with a high turnover cost, a less informative signal is compounded by worse monitoring after a disappointing performance. This ``bad corporate governance trap'' makes it hard for these firms to eventually improve performance.

Keywords: board monitoring, corporate governance system, governance complementarity, hard and soft information, informativeness

JEL Classification: G30, G34, M12

Suggested Citation

Chaigneau, Pierre and Sahuguet, Nicolas, The Complementarity between Signal Informativeness and Monitoring (July 2022). Available at SSRN: https://ssrn.com/abstract=3324589 or http://dx.doi.org/10.2139/ssrn.3324589

Pierre Chaigneau (Contact Author)

Queen's University ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Queen’s University ( email )

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

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