DP11345 The Adverse Effect of Information on Governance and Leverage

Author(s): Christian Laux, Gyöngyi Lóránth, Alan Morrison
Publication Date: June 2016
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11345

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.