Abstract
We examine the corporate governance roles of firms' information quality and the takeover market in disciplining management. Increasing the information quality improves the takeover efficiency, but highly efficient takeover market also discourages the manager from working hard. We find that perfect information quality is not optimal for either the current shareholders' expected payoff maximization or the expected firm value maximization. The current shareholders' choice of information quality is different from the information quality level that maximizes the expected firm value, as the current shareholders only obtain a share of the value enhancement from a successful takeover, and moreover, the current shareholders also obtain an overbidding premium when the acquirer overbids for a low value firm. We also analyze the impact of antitakeover laws on firms' endogenous information quality as well as on the current shareholders' welfare and the firm value. We find that the expected firm value may increase after the adoption of antitakeover laws when the current shareholders are able to adjust their choice of information quality. This happens when the current shareholders increase the information quality in response to antitakeover laws.
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