Article2011

Does Enhanced Disclosure Really Reduce Agency Costs? Evidence from the Diversion of Corporate Resources

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Auditing, Earnings Management, Governance Corporate Finance and Governance Corporate Governance and Financial Management

Abstract

ABSTRACT This study investigates whether extensive disclosure reduces managerial expropriation of corporate resources by examining the potential effects of enhanced reporting on the values of cash assets and investment ventures, respectively. We uncover evidence that liquid asset holdings are valued at a discount by firms with fewer disclosure practices than their more transparent counterparts. Moreover, disclosure activity substantially improves the value of cash assets in excess of requirements for operations and investment. These findings suggest that detailed reporting facilitates the scrutiny and discipline of capital markets, thus preventing the diversion of cash reserves. In further support of the disciplinary power of greater disclosure, we find that value-destroying projects, through internal capital investment and external acquisitions, are concentrated in firms adopting opaque disclosure policies. Collectively, our results support the premise that extensive disclosure impairs insiders' abilities to utilize corporate resources in a self-serving manner. Data Availability: Data are available from public sources indicated in the text..

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 2001Econometric Analysis of Cross Section and Panel Data 1993Common risk factors in the returns on stocks and bonds 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1981Credit Rationing in Markets with Imperfect Information 2001Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature

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