Discussion paper
DP11345 The Adverse Effect of Information on Governance and Leverage
We study the effect that internal information systems have upon a firm’s leverage and
corporate governance choices. Information systems lower governance costs by facilitating
more targeted interventions. But they also generate asymmetric information between firms
and their investors. As a result, firms may attempt to signal their superior quality by
assuming more leverage. In some circumstances, this can reduce governance incentives
and result in inferior outcomes. Investors anticipate this effect, and it renders information
systems inefficient.
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