The Journal of Finance · 2012 · 553 citations · 26 references
Agency ProblemsFirm PerformanceIntegrated ReportingAccountingGreater Corporate DisclosureManagementBusinessStricter Disclosure RulesConfidentialityCorporate GovernanceInformation ManagementFinancial StatementDisclosure
Public policy favors greater corporate disclosure to reduce agency problems, yet this view overlooks that more disclosure can worsen agency problems and raise costs such as executive compensation. The study investigates whether there is a point beyond which additional disclosure decreases firm value. The analysis shows that larger firms adopt stricter disclosure rules than smaller firms, that better disclosure attracts more capable management, and that mandated disclosure increases may partly explain recent rises in CEO compensation and turnover.
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.
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