Information Disclosure and Corporate Governance

Abstract

Public policy discussions typically favor greater corporate disclosure as a way to reduce firms' agency problems. This argument is incomplete because it overlooks that better disclosure regimes can also aggravate agency problems and related costs, including executive compensation. Consequently, a point can exist beyond which additional disclosure decreases firm value. Holding all else equal, we further show that larger firms will adopt stricter disclosure rules than smaller firms and firms with better disclosure will employ more able management. We show that mandated increases in disclosure could, in part, explain recent increases in both CEO compensation and CEO turnover rates.A RESPONSE TO RECENT corporate governance scandals, such as Enron and Worldcom, has been the imposition of tougher disclosure requirements. For example, Sarbanes-Oxley (SOX) requires more and better information: more, for instance, by requiring reporting of off-balance sheet financing and special purpose entities, and better by its increasing the penalties for misreporting. In the public's (and regulators') view, improved disclosure is good.This view is an old one, dating at least to Ripley (1927) and Berle and Means (1932). Indeed, there are good reasons why disclosure can increase the value of a firm. For instance, reducing the asymmetry of information between those inside the firm and those outside can facilitate a firm's ability to issue securities and consequently lower its cost of capital.1 Fear of trading against those * Benjamin Hermalin is with the University of California, Berkeley. Michael Weisbach is with the Ohio State University. We thank the seminar and conference participants at

Corporate Governance and Firm Performance: The Role of Transparency & Disclosure in Banking Sector of Pakistan

“…Dernev, et al (2005) associated a positive link between corporate governance and firm performance. In past various studies suggest an number of ways through which the corporate governance practices can be translated in to improved firm value like in studies by Hermalin, et al (2011). Their study result finding suggest that better price performance is associated with firm that have indicators of high disclose quality, having outside ownership concentration higher and firm which are focused rather that shows diverse.…”

Executive Compensation

“…One possibility is that the poor performance of firms in the 1970s brought about improved board diligence, thereby making the CEO job less secure (Hermalin, 2005). Similarly, enhanced disclosure of financial information may have led to increases in the level of pay to compensate executives for the disutility of stronger monitoring (Hermalin and Weisbach, 2009). These theories are consistent with the increasing fraction of CEOs being hired from outside the firm, the rise in managerial turnover, and the growth in the likelihood of forced departures (Hadlock and Lumer, 1997;Murphy, 1999;Huson, Parrino and Starks, 2001).…”

Study on theories and mechanisms of corporate governance

“…Pahuja and Bhatia (2010) have found that size of a company is a significant determinant of disclosures and there is a substantial scope for improvement in the corporate governance disclosure practices. All other factors being equal, larger firms will adopt stricter disclosure rules than smaller firms and firms with better disclosure will employ more able management (Hermalin and Weisbach, 2012).…”

“…The results indicate that disclosure and timeliness are not significant contributing factors in the relationship between corporate governance and market performance (Haat et al, 2008). Hermalin and Weisbach (2012) stated that public policy discussions typically favour greater corporate disclosure as a way to reduce firms' agency problems. However, better disclosure regimes can also aggravate agency problems and related costs, including executive compensation.…”