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Institute for Financial Research SIFR Research Report Series, Institute for Financial Research

No 76:
Information Disclosure and Corporate Governance

Benjamin E. Hermalin () and Michael S. Weisbach ()

Abstract: In public-policy discussions about corporate disclosure, more is typically judged better than less. In particular, better disclosure is seen as a way to reduce the agency problems that plague firms. We show that this view is incomplete. In particular, our theoretical analysis shows that increased disclosure is a two-edged sword: More information permits principals to make better decisions; but it can, itself, generate additional agency problems and other costs for shareholders, including increased executive compensation. Consequently, there can exist a point beyond which additional disclosure decreases firm value. We further show that larger firms will tend to adopt stricter disclosure rules than smaller firms, ceteris paribus. Firms with better disclosure will tend, all else equal, to employ more able management. We show that governance reforms that have imposed greater disclosure could, in part, explain recent increases in both CEO compensation and CEO turnover rates.

Keywords: Corporate governance; Corporate disclosure; (follow links to similar papers)

JEL-Codes: D82; D83; G30; L20; M42; (follow links to similar papers)

41 pages, September 21, 2010, Revised June 1, 2011

Please find updated version on http://fisher.osu.edu/fin/faculty/weisbach/wpapers.html

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This paper is forthcoming as:
Hermalin, Benjamin E. and Michael S. Weisbach, 'Information Disclosure and Corporate Governance', Journal of Finance.



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