The Corporate Governance Role of Information Quality and Corporate Takeovers

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 firm value. Increasing the information quality improves the takeover efficiency, but more precise information also discourages the manager from working hard. We find that current shareholders prefer a higher information quality level than the one that maximizes firm value. This is because the current shareholders may obtain an overbidding premium by increasing the information quality to induce a higher likelihood of receiving a high-price bid for a low-value firm. We also analyze the effect of antitakeover laws or provisions. We find that the optimal information quality is higher after the adoption of antitakeover law or antitakeover provisions. Moreover, the adoption of antitakeover laws always increases the firm value, but increases the current shareholders’ payoff only when the manager’s private benefit is large and the value enhancement from takeover is small. ∗We would like to thank Tim Baldenius, Anne Beyer, Judson Caskey, Carlos Corona, Jon Glover, Mirko Heinle, John Hughes, Bjorn Jorgensen, Pierre Liang, John O’Brien, Ram Ramanan, Stefano Sacchetto, Jack Stecher, seminar participants at Carnegie Mellon University, and participants at 2012 Junior Accounting Theory Conference and 2013 Financial Accounting and Reporting Section meeting for helpful comments. †Carnegie Mellon University, [email protected]. ‡Purdue University, [email protected]. §Carnegie Mellon University, [email protected].