Governance Reform, Share Concentration and Financial Reporting Transparency in Mexico

Abstract

We examine how financial reporting transparency and quality of Mexican firms vary with corporate governance. We utilize compliance data from the Code of 'Best' Corporate Practices, disclosed annually by public firms in Mexico. We document a significant increase in compliance over the 2000-2004 time period along with improvements in earnings associations with both contemporaneous market returns and future cash flows. These results suggest improved governance characteristics may have led to improved financial reporting and transparency. We directly assess this by designating firms with greater compliance as better governed on an annual basis. The results indicate better governed firms do not exhibit statistically less earnings management behavior. Further, these same firms do not exhibit higher earnings persistence nor does the market place greater weights on the reported earnings relative to less well governed firms. We conclude greater compliance does not lead to improved financial reporting transparency or quality because of the concentrated founding family ownership structure predominant in Mexico. Further, improvements in corporate governance and financial reporting requirements are not likely to lead to corresponding improvements in transparency and reporting without adjusting the requirements to accommodate the ownership structure.

Keywords: Corporate governance, corporate transparency, financial reporting, earnings management, discretionary accruals

JEL Classification: G30, M41, J3