Information Disclosure and Corporate Governance

Disclosure is widely assumed to play an important role in corporate governance. Yet governance has not been the focus of previous academic analyses of disclosure. We consider disclosure in the context of corporate governance. We argue that disclosure is a two-edged sword. On one side, disclosure of information permits principals to make better decisions. On the other, it can create or exacerbate agency problems: The release of information has the potential to harm agents (e.g., management) either through the actions the principals take as a consequence (e.g., dismiss the agent) or because the agents care about how they are perceived (e.g., the agents have career concerns or hold equity in the firm). This can lead agents to pursue actions that are not in the principals’ interests. Moreover, these problems become worse, the more precise the principals’ information. We present a series of models formalizing this idea. These models lead to a number of empirical implications, both for disclosure-increasing regulations and for the relation between disclosure and governance.