Optimal and Mandatory Transparency: Implications for Corporate Governance Regulation∗

In light of recent corporate scandals, numerous proposals have been introduced for reforming corporate governance. This paper provides a theoretical framework through which to evaluate these reforms. We show that reforms that seek to improve the quality of information that is reported will reduce welfare, raise executive compensation, and inefficiently increase the rate of ceo turnover. ∗The authors thank seminar and conference participants at the University of California, the University of Chicago Law School, the University of Illinois, La Trobe University (Bundoora), the London Business School, the University of Queensland, RMIT, the Swedish Institute for Financial Research Conference, Stockholm, the Olin Business School’s Second Annual Conference on Corporate Governance, and the Stanford Accounting Conference. The authors are grateful to Philip Bond, Christian Leuz, Jeroen Swinkels, and, especially, Denis Gromb for their comments and suggestions. †Thomas and Alison Schneider Distinguished Professor of Finance. Contact information — Phone: (510) 642-7575. E-mail: [email protected]. Full address: University of California • Walter A. Haas School of Business • 545 Student Services Bldg. #1900 • Berkeley, CA 94720-1900. ‡Stanley C. and Joan J. Golder Distinguished Chair in Finance. Contact information — Phone: (217) 265-0258. E-mail: [email protected]. Full address: University Of Illinois • 340 Wohlers Hall • 1206 S. Sixth Street • Champaign, IL 61820. Draft 12/1/2006 Version 2 Hermalin and Weisbach Introduction 1