Management Quality, Financial Policies, and Asymmetric Information

54 Pages Posted: 6 Mar 2007 Last revised: 16 Dec 2017

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Imants Paeglis

Concordia University - John Molson School of Business

Karen Simonyan

Suffolk University - Department of Finance

Date Written: November 1, 2006

Abstract

We develop measures of the management quality of firms and make use of a unique sample of hand-collected data to examine the relationship between the reputation and quality of a firm's management and its financial policies, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thus reducing the information asymmetry facing their firm in the equity market. Given this, firms with better and more reputable managements will have more access to the equity market, so that we expect lower leverage ratios for these firms. In addition, they will have less need to signal using dividends, so that they will have lower dividend payout ratios. Further, since better managers are likely to select better projects (having a larger NPV for any given scale) and implement them more ably, higher management quality will also be associated with higher levels of investment and R&D expenditures. We present evidence consistent with the above hypotheses. Our direct tests of the relationship between management quality and asymmetric information also indicate that higher management quality leads to a reduction in the extent of information asymmetry facing a firm in the equity market.

Keywords: Management Quality, Capital Structure, Dividend Policy, Investment Policy, Asymmetric Information

JEL Classification: G24, G31, G32, G35

Suggested Citation

Chemmanur, Thomas J. and Paeglis, Imants and Simonyan, Karen, Management Quality, Financial Policies, and Asymmetric Information (November 1, 2006). Journal of Financial and Quantitative Analysis (JFQA), Vol. 44, No. 5, 2009. Available at SSRN: https://ssrn.com/abstract=967460 or http://dx.doi.org/10.2139/ssrn.967460

Thomas J. Chemmanur

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Imants Paeglis

Concordia University - John Molson School of Business ( email )

Montreal, Quebec H3G 1M8
Canada

Karen Simonyan (Contact Author)

Suffolk University - Department of Finance ( email )

8 Ashburton Place-Beacon Hill
Boston, MA 02108-2770
United States
(617) 973-5385 (Phone)

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