The Corporate Governance Role of Information Quality and Corporate Takeovers

• In Event: Financial Reporting and Corporate Governance

Abstract

This paper examines the corporate governance role of firms' information quality and the takeover market in disciplining management. We consider a model where the takeover market plays a disciplinary role in replacing the inefficient incumbent manager to increase the firm value. Increasing the information quality improves the
takeover efficiency, but more precise information also discourages the manager from making effort. We find that current shareholders prefer a higher information quality level than the one that maximizes the rm value, due to the overbidding premium that the current shareholders may obtain by increasing the information quality to induce a
higher likelihood of receiving a high-price bidding for a low value rm. We also analyze the effect of antitakeover laws or provisions. We find that the information quality is higher after the adoption of antitakeover law or antitakeover provisions. Moreover, the adoption of antitakeover laws always increases the firm value, but increases the current shareholders' payoff only when the manager's private benefit is large and the value enhancement from takeover is small.

Authors

• Jing Li, Carnegie Mellon University

• Lin Nan, Purdue University

• Ran Zhao, Carnegie Mellon University