Transparency and Corporate Governance
MaterialSource:www.hbs.edu/units/am/pdf/HWTransparencyJan2007.pdf Author: Benjamin Hamelin
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1 Abstract
An objective of many propod corporate governance reforms is incread transparency. This goal has been relatively uncontroversial, as most obrvers believe incread transparency to be unambiguously good. We argue that, from a corporate governance perspective, there are likely to be both costs and benefits to incread 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 ek to increa transparency can reduce firm profits, rai executive compensation, and inefficiently increa the rate of CEO turnover. We further consider the possibility that executives will take actions to distort information. We show that executives could have ince
ntives, due to career concerns, to increa transparency and that increas in penalties for distorting information can be profit reducing.
2 Introductions
八旗制度In respon to recent corporate governance scandals, governments have responded by adopted a number of regulatory changes. One component of the changes has been incread disclosure requirements. For example, Sarbanes-Oxley(sox),微信情侣 adopted in respon to Enron, WorldCom, and other public governance failures, 桔梗的功效与作用required detailed reporting of off-balance sheet financing and special purpo entities. Additionally, sox incread the penalties to executives for misreporting. The link between governance and transparency is clear in the public’s (and regulators’) perceptions; transparency was incread for the purpo of improving governance.
Yet, most academic discussions about transparency have nothing to do with corporate governance. The most commonly discusd benefit of transparency is that it reduces asymmetric information, and hence lowers the cost of trading the firm’s curities and the
地震目录firm’s cost of capital. To offt this benefit, commentators typically focus on the direct costs of disclosure, as well as the competitive costs arising becau the disclosure provides potentially uful information to product-market rivals. While both of the factors are undoubtedly important considerations in firms ‘disclosure decisions, they are not particularly related to corporate governance.
In this paper, we provide a framework for understanding the role of transparency in corporate governance. We analyze the effect that disclosure has on the contractual and monitoring relationship between the board and the CEO. We view the quality of information the firm disclos as a choice variable that affects the contracts the firm and its managers. Through its impact on corporate governance, higher quality disclosure both provides benefits and impos costs. The benefits reflect the fact that more accurate information about performance allows boards to make better personnel decisions about their executives. The costs ari becau executives have to be compensated for the incread risk to their careers implicit in higher disclosure levels, as well as for the incremental costs they incur trying to distort information in equilibrium. The costs and b
物联网通信技术enefits complement existing explanations for disclosure. Moreover, becau they are directly about corporate governance, they are in line with common perceptions of why firms disclo information.
We formalize this idea through an extension of Hamelin and Wasatch (1998) and Hamelin’s (2005) adaptation of Hailstorm’s (1999) career-concerns model to consider the question of optimal transparency. Section 2 lays out the basics of this model, in which the company choos the “quality” of the performance measure that directors u to asss the CEO’s ability. In this model, the optimal quality of information for the firm to reveal can be zero, infinite, or a finite positive value depending on the parameters. When we calibrate the model to reflect actual publicly traded large us corporations, we find that the parameters implied by the calibration lead to a finite value for optimal disclosure quality. Thus, our analysis suggests that disclosure requirements going beyond this optimal level are likely to have unintended conquences and to reduce value.
We evaluate the implications of penalties and incentives that potentially affect the motives
奢华的近义词of CEOs to distort the information coming from their firms. Measures that punish exaggerating effort can be effective if they are sufficiently vere to curtail this effort; however, relatively minor penalties can be counterproductive. In addition, incentives for CEOs to improve the accuracy of information can harm shareholders becau such incentives push a CEO to disclo more than the value-maximizing quantity of information.
3 Concealing Information
In light of some recent corporate scandals, one concern is not that executives distort information, but rather that they conceal it. In this subction, we briefly address what our analysis can say with respect to concealing information. One question is whether the other players know if the CEO has concealed information? If so, then presumably they can punish the CEO for non-disclosure Moreover, if it is common knowledge that the CEO knows the value of signals that he conceals, then an unraveling argument (Grossman, 1981)applies: Whatever the inferred expected value of unrevealed signals is,
the CEO will have an incentive to reveal tho above that expected value. Hence, the only equilibrium is one in which unrevealed signals are inferred to have the lowest possible value and the CEO is correspondingly induced to reveal all signals. We predict therefore that concealment is unlikely to be an issue if the other players know what the t of signals is.
