Abstract
Both private and public information are valuable and affect the cost of capital (Easley and O`Hara, 2004). We endogenize the production of these types of information within the firm. In a simple agency problem in the presence of adverse selection, both private and public information are valuable because they lead to more efficient contracting. We solve for the optimal linear contract and obtain simple expressions of how the value of the firm depends on its information environment. Assuming that the manager has access to technologies that produce both public and private information, we solve for the equilibrium at the information acquisition stage. Depending on the cost of information production, some firms will rely more on public information, while others generate more private information. We examine the desirability of stricter accounting standards such as the Sarbanes-Oxley act and give predictions on which firms will be better off by delisting as a consequence. Finally, we relate our results to executive compensation. We show how some firms will find it optimal to rely heavily on their manager`s production of private information. The large rents accruing to these managers in equilibrium are not due to their effort, but rather due to their superior knowledge of the business and ability to generate information that improves the efficiency of the firm.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.