Transparency and Corporate Governance

Benjamin Hermalin and Michael Weisbach

No 12875, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G32 G38 M41 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-acc, nep-bec and nep-cfn
Note: CF LE LS
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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