Blinded by the Light: Ownership Structure and Incentivizing Transparency

Abstract: We explore the choice of corporate governance with a game theoretic mechanism where the choice influences firm valuation and performance. The research is motivated by a natural experiment in Japan that allowed for two distinct governance systems to coexist. This paper seeks to resolve the empirical conundrum that, given the established strategic value of a shareholder oriented corporate governance system including outside directors, few firms self-select such a system when a choice is offered. We explore the incentives and payoffs to both management and shareholders to examine if there is a reasonable incentive for management to signal truthful information. We find, using a database of Japanese public corporations, that without an exogenous structure allowing compensating management for truthful revelation, management will not have incentive to select such a system. Thus we resolve an empirical conundrum that firms may not select systems of corporate governance that are the most beneficial to shareholders because they might not anticipate sharing in the gains.