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

Abstract

Abstract:We review recent literature on the role of financial reporting transparency in reducing governance-related agency conflicts among managers, directors, and shareholders, as well as in reducing agency conflicts between shareholders and creditors, and offer researchers some suggested avenues for future research. Key themes include the endogenous nature of debt contracts and governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the heterogeneous nature of the resulting governance and debt contracts. We also emphasize the role of a commitment to financial reporting transparency in facilitating informal multi-period contracts among managers, directors, shareholders, and creditors.Keywords: financial accounting; corporate governance; board structure; contracting; executive compensation; debt contracts; informal contracts We thank the following for helpful comments and suggestions:

Implications for GAAP from an analysis of positive research in accounting

“…Similar to recent suggestions by Armstrong, Guay, and Weber (2010) and Rowchowdhury (2010), although recent research has established associations between certain accounting attributes (such as conditional conservatism and earnings timeliness) and features of the contracting environment (such as the form and pricing of debt agreements and the nature of managers' investment decisions), we still know relatively little about precisely why these features have survival value in performance evaluation and stewardship, although the theory we review in Section 2 makes it clear that we have some understanding and predictions about this. Armstrong et al (2010, pp.…”

“…However, in general the two are complements in that high quality auditing is likely to be associated with financial statements prepared with a credible application of conservatism, and conversely, low quality audits are likely to be associated with a not-so-credible application of conservatism in the preparation of financial statements. 36 Armstrong et al (2010) reviews the debt-contracting literature in detail. See Section 5 of their review in particular.…”

“…As discussed in Section 2, we abstract from agency problems between the board and management to focus on the more prominent agency problem between management and the stockholders. However, as is also discussed by Armstrong, Guay, and Weber (2010), future research might benefit from work that examines a fuller version of the agency problems between boards, managers, stockholders, as well as between different groups of stockholders (e.g., dominant family holders, individual minority holders, etc. ).…”

“…120 However, beyond the fact that conditional conservatism seems to have long-run survival value as a feature of financial reporting, we have relatively little specific evidence on the costs and benefits of imposing certain accounting principles in the general purpose financial statements versus allowing contracting parties to include these features in private contracts. 121 That is, as Armstrong, Guay and Weber (2010) point out elsewhere in this issue, we need to understand more about why certain accounting attributes (such as conservatism and earnings timeliness) are valuable in certain contractual settings.…”

Determinantes das Republicações no Mercado Brasileiro: Uma Análise a partir dos Incentivos ao Gerenciamento de Resultados

“…Entende-se por Governança Corporativa todo mecanismo interno e externo que tem como objetivo alinhar os interesses entre os agentes e os principais e mitigar os problemas de agência (Armstrong, Guay, & Weber, 2010). O agente (gestor), assumindo a gestão de recursos em nome dos principais, se obriga a prestar contas (accountabillity) de forma transparente, equânime e em conformidade com as normas e legislações vigentes (Brown & Caylor, 2009;Yoo & Jung, 2015).…”