Benjamin E. Hermalin
() and Michael S. Weisbach
Benjamin E. Hermalin: University of California
Michael S. Weisbach: Ohio State University
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.
41 pages, First version: September 21, 2010. Revised: June 1, 2011.
Note: Please find updated version on http://fisher.osu.edu/fin/faculty/weisbach/wpapers.html
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