Working Paper: NBER ID: w12875
Authors: Benjamin E. Hermalin; Michael S. Weisbach
Abstract: An objective of many proposed corporate governance reforms is increased transparency. This goal has been relatively uncontroversial, as most observers believe increased transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to increased transparency, leading to an optimum level beyond which increasing transparency lowers profits. This result holds even when there is no direct cost of increasing transparency and no issue of revealing information to regulators or product-market rivals. We show that reforms that seek to increase transparency can reduce firm profits, raise executive compensation, and inefficiently increase the rate of CEO turnover. We further consider the possibility that executives will take actions to distort information. We show that executives could have incentives, due to career concerns, to increase transparency and that increases in penalties for distorting information can be profit reducing.
Keywords: Corporate Governance; Transparency; CEO Turnover
JEL Codes: G32; G38; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased transparency (G38) | decreased firm profits (D21) |
| increased transparency (G38) | increased executive compensation (M12) |
| increased transparency (G38) | higher rates of CEO turnover (J63) |
| higher quality disclosure (L15) | improved board decision-making regarding executive performance (G34) |
| increased transparency (G38) | increased risks for executives (M12) |
| reforms aimed at increasing transparency (G38) | decreased firm profits (D21) |
| reforms aimed at increasing transparency (G38) | increased CEO turnover rates (G34) |