Information Asymmetry and Corporate Governance in New Zealand

This paper examines the effect of information asymmetry on the governance structure of New Zealand firms. It is found that firms facing higher information asymmetry tend to have a smaller and less independent board of directors, and the chief executive officer (CEO) is more likely to be included on the board. Evidence is found that CEO ownership substitutes for board monitoring in the presence of high information asymmetry but that information asymmetry does not affect block or institutional ownership. The results are consistent with the monitoring cost hypothesis and support the idea that governance is endogenously and optimally determined. Consistent with this view, it is found that governance does not affect firm performance. However, governance regulations introduced in New Zealand are found to have negatively affected the performance of firms that were forced to change their governance structure