governance mechanisms and corporate transparency.pdf

Governance Mechanisms and Corporate Transparency∗ Robert Hauswald Robert Marquez American University Arizona State University Current Version May 2009 JEL Classification: G21, L51, O31 ∗We thank Nittai Bergman, Antonio Bernardo, Laura Field, Andrew Roper, Martin Ruckes, as well as seminar participants at American University, Arizona, ASU, Georgia, Indiana, McGill, Minnesota, Notre Dame, NYU, Penn State, Rice, UCLA, Wisconsin, and the 2007 AFA Meetings for useful comments. The usual disclaimers apply. Contact information: Robert Marquez, W. P. Carey School of Business, Arizona State University, Tempe, AZ 85287, rsmarquez@asu.edu, and Robert Hauswald, Kogod School of Business, American University, Washington, DC 20016, hauswald@american.edu. Governance Mechanisms and Corporate Transparency Abstract By promoting greater corporate transparency firms can foster external scrutiny. However, the resulting actions are likely to reduce the incentives for internal accountability. Hence, a firm’s reliance on external versus internal oversight is itself an aspect of its governance policies. More- over, these competing mechanisms interact with technological progress and regulatory reform in determining the overall quality of oversight. In equilibrium, firms equalize the marginal ben- efits of internal and external governance through their degree of transparency. However, agency problems between the board and shareholders may lead to inefficient levels of both transparency and internal oversight. We show that new technology, as emphasized by recent regulation, can mitigate such inefficiencies. Improvements in information dissemination enhance transparency so that greater external scrutiny allows the