Financial accounting information and corporate governance

Abstract

This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first discuss research on the use of financial accounting in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research. We also propose cross-country research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally. r 2001 Elsevier Science B.V. All rights reserved.

Consequences of financial reporting quality on corporate performance: Evidence at the international level

“…This leads to a CSR investment that benefits not only stakeholders but also investors, a key factor that determines future improved performance. Along the same line, Bushman and Smith (2001) document that financial and accounting information influences future economic performance and predict that better FRQ leads to an improvement in the efficiency of various investments.…”

“…Meanwhile, Ahmed and Duellmand (2011) show that conservative companies enjoy better future profitability due to their investment in more efficient projects. Bushman and Smith (2001) also report that companies with higher FRQ are bound to promote profitable investment decisions and thus, these companies could view increases in their corporate performance. In this line, Rajgopal and Venkatachalam (2011), making used of Dechow and Dichev's (2002) model to estimate EQ, obtain empirical evidence of the positive link between the changes in FRQ in recent decades and rising idiosyncratic return volatility.…”

“…According to previous evidence, those companies with better quality of financial information are associated with subsequent higher performance, due to the fact that the market positively assesses those companies which are more committed to the issuance of good information for shareholders and other stakeholders, aiming to reduce or avoid information asymmetries between market participants (García- Lara et al, 2010;Ahmed and Duellmand, 2011;Bushman and Smith, 2001;Bens et al, 2002;Gunny, 2005).…”

The role of information and financial reporting in corporate governance and debt contracting

“…By conditioning the executive's compensation (or, more broadly, the executive's wealth) on these performance measures, the board attempts to align the executive's incentives and actions with the interests of shareholders. Bushman and Smith (2001) identify two primary roles for accounting information in these moral hazard models: (1) creating incentives for the agent to take actions, possibly across 23 Since the principal's problem is to induce the agent to take an unobservable action in a moral hazard model and to induce the agent to reveal his or her private information in an adverse selection model, these models are sometimes referred to as models of "hidden action" and "hidden information," respectively (Arrow, 1985). multiple activities, and (2) filtering noise from other performance measures (e.g., stock price) to avoid imposing unnecessary (and, therefore, costly) risk on the agent.…”

“…Our review builds on the surveys of Bushman and Smith (2001), Lambert (2001) and Fields, Lys, and Vincent (2001), and we strive to limit our overlap with those papers by focusing on research that has evolved since the time of those surveys. Specifically, in the governance area, papers have begun to explore how a commitment to financial reporting quality influences both board structure and ownership structure, although the causality of this relation is likely to go in both directions).…”