Moral Hazard and the Corporate Information Environment

47 Pages Posted: 5 Oct 2021 Last revised: 23 Mar 2022

See all articles by Dan Luo

Dan Luo

Stanford University, Graduate School of Business, Students

Date Written: October 2, 2021

Abstract

Much of corporate managers’ incentive is related to the stock price. Consequently, a firm can design its corporate information environment to tackle its manager’s moral hazard problem. We analyze a model in which the manager needs to exert costly effort to implement a risky, long-term project and the project gives the manager opportunities to make credible disclosure. The optimal disclosure to motivate effort is the manager’s strategic disclosure because it protects the manager from the downside of the project and induces the rational stock market to punish nondisclosure. A more transparent information regime is not always preferred because it may reduce the manager’s discretion on disclosure. We also derive the optimal disclosure when both the effort and the project choice are considered.

Keywords: moral hazard, information design, strategic disclosure, information environment

JEL Classification: D82, D83, G34

Suggested Citation

Luo, Dan, Moral Hazard and the Corporate Information Environment (October 2, 2021). Available at SSRN: https://ssrn.com/abstract=3935008 or http://dx.doi.org/10.2139/ssrn.3935008

Dan Luo (Contact Author)

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

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