The Role of Financial Reporting and Transparency in Corporate Governance

22 Pages Posted: 23 Aug 2016 Last revised: 16 Dec 2017

See all articles by Chris Armstrong

Chris Armstrong

University of Pennsylvania - Accounting Department

Wayne R. Guay

University of Pennsylvania - Accounting Department

Hamid Mehran

Independent

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: 2016

Abstract

The authors review recent literature on the role of corporate financial reporting and transparency in reducing governance-related agency conflicts between managers, directors, shareholders, and other stakeholders—most notably financial regulators—and suggest some avenues for future research. Key themes include the endogenous nature of governance mechanisms with respect to information asymmetry between contracting parties, the heterogeneous nature of the informational demands of contracting parties, and the corresponding heterogeneity of the associated governance mechanisms. The authors also emphasize the role of credible commitment to financial reporting transparency in facilitating informal multiperiod contracts among managers, directors, shareholders, and other stakeholders. Finally, they discuss the importance of regulatory supervision and oversight as a class of governance mechanisms that is particularly important for banks and financial institutions.

Keywords: financial accounting, corporate governance, board structure, contracting, executive compensation, informal contracts, financial institutions, information asymmetry, corporate transparency

JEL Classification: D82, D86, G21, G23, G24, G28, G30, G34, G38, M40,

Suggested Citation

Armstrong, Chris S. and Guay, Wayne R. and Mehran, Hamid and Weber, Joseph Peter, The Role of Financial Reporting and Transparency in Corporate Governance (2016). Economic Policy Review, Issue Aug, pp. 107-128, 2016, Available at SSRN: https://ssrn.com/abstract=2828077

Chris S. Armstrong (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Wayne R. Guay

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
1329 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6365
United States
215-898-7775 (Phone)
215-573-2054 (Fax)

Hamid Mehran

Independent ( email )

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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