Project Selection, Information Feedback, and Catering to Market Belief

Chen, Hui; Schneemeier, Jan

doi:10.2139/ssrn.4296418

Cited by 1 publication

(1 citation statement)

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“…As opposed to a signal of firm performance, which is “hard” or verifiable information, the information gathered by boards via monitoring is typically “soft” or nonverifiable (Cornelli, Kominek, and Ljungqvist [2013]). It is already well known that hard and soft information can be complementary (Gigler and Hemmer [1998], [2001], Dye and Sridhar [2004], Şabac and Tian [2015], Jiang [2016], Chen and Schneemeier [2022]). These papers study the complementarity of hard information and soft information when the latter is a report by the manager and the manager can misreport.…”

Section: Introductionmentioning

confidence: 99%

The Complementarity Between Signal Informativeness and Monitoring

Chaigneau

Sahuguet

2022

J of Accounting Research

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A firm that must decide whether to retain or terminate a manager can rely on several sources of information to assess managerial ability. When it relies on a performance signal and monitoring, we show that a more informative signal can surprisingly increase the value of monitoring. Then, signal precision and monitoring are complements. This happens if a more precise information system makes some signals more negative indicators of managerial ability that still do not trigger termination. When the turnover cost is high enough and the manager is more entrenched after a positive performance, an increase in signal precision increases expected monitoring. In firms with a high turnover cost, a less informative signal is compounded by worse monitoring after a disappointing performance. This "bad corporate governance trap" makes it hard for these firms to eventually improve performance.

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