The Value of Public and Private Information in Firms: An Agency View

Abstract

Both private and public information are valuable and affect the cost of capital (Easley and O'Hara, 2004). We endogenize the production of these types of information within the firm. In a simple agency problem in the presence of adverse selection, both private and public information are valuable because they lead to more efficient contracting. We solve for the optimal linear contract and obtain simple expressions of how the value of the firm depends on its information environment. Assuming that the manager has access to technologies that produce both public and private information, we solve for the equilibrium at the information acquisition stage.