The Information Environment of Firms with Worker Representation on Corporate Board

Abstract

We provide evidence that firms with worker representation on their board have more transparent information environments. We use a discontinuity in the German laws on worker representation for identification and find strong and consistent evidence that firms with worker representation are associated with smaller analyst earnings forecast errors. We identify several channels for the improved transparency, including more detailed management guidance and more detailed financial statement reporting. Moreover, we find that insider purchases in firms with worker representation are less opportunistic than in firms with no worker representation. Our evidence is consistent with economic theory that predicts worker representatives provide operational first-hand knowledge to the board, which translates to more transparency and less information asymmetry. Overall, our results indicate that firms with worker representation have a more transparent information environment and that worker representatives in the boardroom have an important informational role that reduces information asymmetries.

Keywords: board members, worker representation, information environment, analysts, earnings forecasts, insider trading, corporate governance, corporate transparency

JEL Classification: G17, G34, J50, M41