ABSTRACT
This paper examines the effect of CEO ability on corporate opacity. High-ability CEOs may seek to create greater transparency to convey their ability to the market, while low-ability CEOs may signal-jam the market's inferences about their talent by limiting the available information. An analysis of S & P 500 firms indicates that firms with high-ability CEOs are significantly less opaque than firms with low-ability CEOs, and that corporate opacity decreases value more for firms managed by low-ability CEOs. Low-ability CEOs hiding behind opacity get away with it owing to lack of strong corporate governance, suggesting that corporate governance is critical for hiring and retaining talented CEOs, and also for preventing low-ability CEOs from exploiting corporate opacity. These findings are robust to the use of samples that are propensity score matched on firm complexity and past firm performance, and also to the use of alternative ability proxies and alternative measures of CEOs' choice of transparency.
6. Conclusion
Previous studies indicate that corporate transparency has many tempting benefits, such as reduction of information asymmetries and mitigation of agency costs, along with performance or valuation premiums. My finding that there is a negative relation between CEO ability and corporate opacity provides an alternative point of view, and it suggests two different explanations. High-ability CEOs may be using discretion to maximize transparency in their own interest as well as that of their shareholders, while low-ability CEOs may be signal-jamming the market's inferences about their talent by limiting the available information. Alternatively, it might be that low-ability CEOs seek out more opaque firms in order to mask their expected poor performance. While it is difficult to distinguish between these two notions, the negative association between CEO ability and corporate opacity is strong. This finding is robust to the use of samples matched on firm complexity and past firm performance, to alternative ability proxies, and to more direct measures of CEOs' choice of transparency.
While both opacity and low CEO ability separately damage firm performance and value, the combination is even worse. I find that firms with low-ability CEOs and the poorest performance are also likely to have CEO duality and a high governance index, both indicators of weak board monitoring. These findings suggest that corporate governance is a key element in hiring and keeping talented CEOs, and also in preventing the less talented from exploiting corporate opacity.
