Incomplete Financial Contracting, Disclosure, Corporate Governance and Firm Value - with Evidence from a Moderate Market for Corporate Control Environment

Abstract

Firms are organized as nexuses of contracts to reduce transaction costs arising from the bounded rationality of humans. The managers and others who enter into contracts also are boundedly rational, which makes all contracts incomplete. For external finance contracts, corporate governance is a remedy for reducing transaction costs arising from incomplete governance arrangements of such contracts. Three components of corporate governance established by firms (voluntary disclosure, internal corporate governance and external corporate governance) are examined in this paper. These corporate governance components and a composite variable of these components representing the overall corporate governance of firms are found to be positively associated with the level of uncertainty arising from the incomplete governance arrangements of finance contracts. The composite corporate governance variable is value relevant.

Keywords: incomplete knowledge, transaction cost, incomplete financial contracting, voluntary disclosure, corporate governance, firm value

JEL Classification: D23, G34, L22, M41, M45