Governance Mechanisms, Corporate Disclosure, and the Role of Technology

This paper explores a firm's reliance on internal and external governance mechanisms, recognizing that the choice of one instrument relative to the other is itself part of the governance policy of the firm. Starting from the premise that firms' disclosure policies can foster external scrutiny and takeover activity we show that such external instruments then become substitutes for internal monitoring and restructuring. We also argue that, since technological progress affects the returns to internal and external information acquisition, its incidence on firms' disclosure policy drives the relative effectiveness of the two governance mechanisms. Specifically, we show that improvements in dissemination technology lead to more disclosure and more successful external governance, but less board monitoring and internal restructuring. By contrast, general advances affecting information processing have the opposite effect unless they only enhance internal processing capabilities such as performance measurement and reporting systems, in which case they increase voluntary disclosure. We also find that firms' disclosure policies fall short of the social optimum, thus providing a rationale for regulation that sets and enforces minimal disclosure standards. Our results are robust to the introduction of agency conflicts between shareholders and their boards, although divergent interests reduce the overall effectiveness of technological advances in fostering good governance. Throughout we discuss empirical implications and lessons for the design of corporate-governance arrangements.