The Complementarity Between Signal Informativeness and Monitoring
Chaigneau, Pierre; Sahuguet, Nicolas
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.
This is the peer reviewed version of the following article: Chaigneau, P. and Sahuguet, N. (2022), The Complementarity Between Signal Informativeness and Monitoring. Journal of Accounting Research. https://doi.org/10.1111/1475-679X.12459, which has been published in final form at https://doi.org/10.1111/1475-679X.12459. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
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