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We examine the corporate governance roles of information quality and the takeover market with asymmetric information regarding the value of the target firm. Increasing information quality improves the takeover efficiency however, a highly efficient takeover market also discourages the manager from exerting effort. We find that perfect information quality is not optimal for either current shareholders’ expected payoff maximization or expected firm value maximization. Furthermore, current shareholders prefer a lower level of information quality than the level that maximizes expected firm value, because of a misalignment between current shareholders’ value and total firm value. We also analyze the impact of antitakeover laws, and find that the passage of antitakeover laws may induce current shareholders to choose a higher level of information quality and thus increase expected firm value.


This is a pre-copy-editing, author-produced PDF of an article accepted for publication in Review of Accounting Studies, volume 23, issue 3, in 2018 following peer review. The final publication is available at Springer via DOI:10.1007/s11142-018-9449-z.

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Available for download on Sunday, June 16, 2019