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Management Quality, Financial and Investment Policies, and Asymmetric Information

Published online by Cambridge University Press:  01 October 2009

Thomas J. Chemmanur ,
Imants Paeglis  and
Karen Simonyan
Thomas J. Chemmanur
Affiliation:
Boston College, Carroll School of Management, 440 Fulton Hall, Chestnut Hill, MA 02467. [email protected]
Imants Paeglis
Affiliation:
Concordia University, John Molson School of Business, 1455 de Maisonneuve Boulevard West, Montreal, Quebec H3G 1M8, Canada. [email protected]
Karen Simonyan
Affiliation:
Suffolk University, Sawyer Business School, 8 Ashburton Place, Boston, MA 02108. [email protected]
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Abstract

We develop measures of the management quality of firms and make use of a unique sample of hand-collected data to examine the relationship between the reputation and quality of a firm’s management and its financial and investment policies, a relationship that has so far received little attention in the literature. We hypothesize that better and more reputable managers are able to convey the intrinsic value of their firm more credibly to outsiders, thus reducing the information asymmetry facing their firm in the equity market. Given this, firms with better and more reputable managers will have more access to the equity market, so that we expect lower leverage ratios for these firms. In addition, they will have less need to signal using dividends, so that they will have lower dividend payout ratios. Further, since better managers are likely to select better projects (having a larger net present value (NPV) for any given scale) and to implement them more ably, higher management quality will also be associated with higher levels of investment. We present evidence consistent with the above hypotheses. Our direct tests of the relationship between management quality and asymmetric information also indicate that higher management quality leads to a reduction in the extent of information asymmetry facing a firm in the equity market.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 5 , October 2009 , pp. 1045 - 1079
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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