Information Disclosure, Agency Costs And Managerial Self-serving Behavior

At the beginning of this new century, several famous American companies such as Enron and WorldCom went into financial scandal. The world was shocked that public companies disclosed untruthful financial information to outside stakeholders. So the moral hazard of management has received much attention in theory and practice.As a transitional economy, China's overall investor protection is quite weak, and the problem of insider control is very serious. So the management of Chinese listed companies have great incentives to take their private benefit of control and expropriate outside shareholders. Based on this institutional background, this dissertation examines the effects of information disclosure quality and management overconfidence on self-serving behavior of management, integrating principal-agent theory, information asymmetry theory and behavior corporate finance theory.Chapter 1 is introduction. I describe the background and implication of this dissertation, discuss the research design and research method, and illustrate the marginal contribution. This chapter gives the overall framework of this dissertation. In chapter 2, I mainly describe the institutional background of China. China is a transitional economy and the history of her stock market is quite short. I illustrate the strong regulation of Chinese stock market, the corporate governance of Chinese listed companies, the information disclosure regulation and practice in China. These institutional backgrounds build the practice foundation of this dissertation.Chapter 3 is literature review. I give a thorough review of previous literature about information disclosure, management overconfidence and self-serving behavior.Previous research has found empirical evidence that the improvement of information disclosure can limit the self-serving behavior of management. But previous literature mainly focuses the role of financial information in management incentive compensation contract and management turnover, and neglect the role of information disclosure limits management self-serving behavior directly. Moreover, the development of behavior corporate finance makes researchers think management could behavior irrationally, such as overconfidence and overoptimistic. And the irrational behavior of management is also mainly self-serving. But the research of behavior corporate finance in China is just on the beginning, the empirical evidence is quite scare. This dissertation enriches existing literature by examining the directly role of information disclosure in limiting management self-serving behavior and introducing behavior corporate finance, especially management overconfidence in analyzing management self-serving behavior.In chapter 4, I discuss the research design in detail. I define the concept of information disclosure quality and management overconfidence, discuss their measurement. The measurement is based on previous literature, but I make some critical adjustment to better reflect the institutional environment of China.In chapter 5, I examine the effect of information disclosure quality on management self-serving behavior empirically. In this chapter, I use the overinvestment and merger to measure management self-serving empire building behavior, and test whether information disclosure quality could limit these types of self-serving behavior of management. I select Chinese listed companies during 2002-2006 as research sample, excluding financial firms and firms with missing data. The empirical evidence suggests that the quality of earnings information disclosure is significant negative to the extent of management self-serving behavior, such as overinvestment and empire building merger. The more aggressive or opaque the reported earnings, the more likely the corporate overinvestment and merger. Both overinvestment and merger are corporate behavior mainly based on management self-serving consideration, so these types of corporate behavior are not corporate value-maximizing and can lead to performance decrease in near future. After controlling other relating factors, I still find evidence that information disclosure quality is a significant limiting factor of management self-serving behavior. This evidence suggests, as an important mechanism of corporate governance, high quality information disclosure can help minority shareholders monitoring management self-serving behavior immediately and effectively, and then reduce the extent of corporate overinvestment and empire building mergers. On the other hand, high quality information disclosure can solve the problem of information asymmetry between management and shareholders effectively, so the shareholders can distinguish management self-serving behavior easily.In chapter 6, I examine the effect of management overconfidence on their self-serving behavior empirically. In this chapter, I relax the assumption of rational management in traditional corporate finance, and analyze relationship of overoptimistic in management earnings forecast and empire building. I select Chinese A-share listed companies (excluding financial firms) that forecast their annual financial report optimistically during 2002-2006 as research sample. The empirical evidence suggests that the more optimistic the management earnings forecast, the more likely the corporate overinvestment. The overinvestment is based on management self-serving consideration to build an empire under their control. Such overinvestment can make company expand not to maximizing the value of shareholders, so the financial performance of these companies gets worse.The last part concludes and gives specific policy suggestions. Limitations and future research directions are also given in this chapter.Overall, with nearly twenty years'development, stock market in China has made great improvement and has become an important part of the whole economy. The government has set a series of regulation policies with intent to protect minority shareholders. Meanwhile, there are still a great deal of problem in regulation environment, management behavior and information disclosure quality. This dissertation examines the relationship of information disclosure quality, management overconfidence and management self-serving behavior theoretically and empirically. The evidence suggests that in a transitional economy of China, the improvement of information disclosure quality can limit management self-serving behavior effectively, and their self-serving behavior relates to management overconfidence in behavior corporate finance perspective. These results have great implications to limit management self-serving behavior, protect minority shareholders and promote capital market development in China.