Information Disclosure and Corporate
BENJAMIN E. HERMALIN and MICHAEL S. WEISBACH∗
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.
A RESPONSE TO RECENT corporate governance scandals, such as Enron and
Worldcom, has been the imposition of tougher disclosure requirements. For example, Sarbanes-Oxley (SOX) requires more and better information: more, for instance, by requiring reporting of off-balance sheet ﬁnancing and special purpose entities, and better by its increasing the penalties for misreporting. In the public’s (and regulators’) view, improved disclosure is good.
This view is an old one, dating at least to Ripley (1927) and Berle and Means
(1932). Indeed, there are good reasons why disclosure can increase the value of a ﬁrm. For instance, reducing the asymmetry of information between those inside the ﬁrm and those outside can facilitate a ﬁrm’s ability to issue securities and consequently lower its cost of capital.1 Fear of trading against those
∗ Benjamin Hermalin is with the University of California, Berkeley. Michael Weisbach is with the Ohio State University. We thank the seminar and conference participants at the University of
California; University of Chicago Law School; University of Illinois; La Trobe University
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