Corporate communication as a governance mechanism

We examine whether corporate communication is a stand-alone governance mechanism. Corporate communication is measured by length (to capture the amount), dictionary (to capture the informativeness), and communication index (to capture the diversity of disclosed information). Using content analysis technique on more than 150,000 filings of 98 Canadian firms from 1999 to 2014, we find that firms’ communication have governing powers. Our findings confirm substitution-complementary relationship between corporate communication and board size, independence, education, expertise, CEO duality, frequency of board meetings, gender diversity, institutional ownership, and product market competition. Moreover, we show that negative deviation from the expected transparency is associated with negative changes in Tobin’s Q, confirming the disciplinary role of corporate communications. We also find that communication has an inverted U-shaped association with Tobin’s Q, and a U-shaped association with firm’s risk, showing the non-linearity and existence of an optimum point in communications. Results are robust when controlling for corporate major events (M&A, Spin-offs, Financial distress and bankruptcy, and major lawsuits)