Corporate governance under asymmetric information: Theory and evidence

• Published in: Economic modelling 2013-07, Vol.33, p.280-291
• Main Authors: Chen, Chen-Wen, Liu, Victor W.
• Format: Article
• Language: English
• Subjects: Asymmetric information; Audit; Board of directors; Corporate governance; Disclosure; Economic theory; Information science; Moral hazard; Organizational effectiveness; Shareholders rights; Stock prices; Studies
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2013.04.010

This paper discusses and explores three situations under asymmetric information. First, companies with a higher level of corporate governance provisions compensate the owner–manager with a higher managerial reward for information disclosed. Second, there are significant and positive relationships between information disclosed and corporate governance provisions, as well as between company value and corporate governance provisions. The higher proportion of a firm held by the largest owner(s) has negative impacts on information disclosed and shareholder rights as outside investors underestimate the companies' performance caused by insufficient effort of the owner–manager or by other factors. Third, audits improve moral hazard when outside investors are informed of bad company performance by underestimating the stock price. •We derive situations in which investors evaluate companies with corporate governance.•Managers are induced to establish a company with corporate governance provisions.•We examine impacts of corporate governance on company by asymmetric information.•Information-disclosing efforts are exerted by the owner–manager.•Audits improve moral hazard by investors underestimating the stock price.