Governance Mechanisms and Corporate Disclosure

Abstract

Corporate disclosure policies, by promoting greater transparency, foster external scrutiny and thus activity in the market for corporate control. A firm's relative reliance on takeovers versus internal board monitoring is therefore itself an aspect of its governance arrangements. However, agency problems between the board and shareholders may lead to inefficient levels of both monitoring and disclosure. We show that technological progress can mitigate such inefficiencies. Improvements in dissemination technology lead to more disclosure and improved external governance, allowing the board to monitor less. By contrast, advances in information processing that increase the returns to information acquisition lead to less disclosure and more internal governance. We also find that competition in the takeover market allows firms to reduce disclosure because there are more players potentially providing external governance. From a social welfare perspective, we find that firms disclose too little, thus providing a rationale for regulation that enforces minimal disclosure standards.