Asymmetric Information and the Choice of Corporate Governance Arrangements

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Abstract
This paper analyzes how asymmetric information affects which corporate governance arrangements firms choose when they go public. It is shown that such asymmetry might lead firms to adopting - through the design of securities and corporate charters - corporate governance arrangements that are known to be inefficient both by public investors and by those taking firms public. When assets with higher value produce opportunities for higher private benefits of control, asymmetric information about the asset value of firms going public will lead some or all such firms to offer a sub-optimal level of investor protection. The results can help explain why charter provisions cannot be relied on to provide optimal investor protection in countries with poor investor protection, why companies going public in the US commonly include substantial antitakeover provisions in their charters, and why companies rarely restrict self-dealing or the taking of corporate opportunities more than is done by the corporate laws of their country. The analysis also identifies a potentially beneficial role that mandatory legal rules might play in the corporate area.

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