In a paper recently accepted for publication in Contemporary Accounting Research, Lihong Liang, assistant professor of accounting at the Joseph I. Lubin School of Accounting, located within the Martin J. Whitman School of Management at Syracuse University, found that shareholder participation improves financial reporting quality. Co-authors were William Barber (Georgetown University), Sok-Hyon Kang (George Washington University) and Zinan Zhu (National University of Singapore).
The paper, titled “External Corporate Governance and Misreporting,” analyzed external governance provisions, specifically those provisions that limit direct shareholder participation in the governance process. The researchers found that fewer restrictions on shareholder participation are associated with a relatively low incidence of accounting restatements.
“We investigated associations between misreporting and external governance characteristics, which dictate the ability of shareholders to participate directly in the corporate governance process,” explained Liang. “Accounting irregularities are significant events, as sample firms experience (on average) a 6.7 percent loss of shareholder value around the time of the subsequent restatement disclosure.”
Liang and her co-authors defined external governance as those statutory and corporate charter provisions that discourage shareholders from participating in the decision-making and governance processes. In the research, firms whose provisions restricted shareholder intervention were presumed to have weak external governance, and firms with relatively few such provisions were presumed to have strong external governance.
“We discovered that misreporting is more likely for firms characterized by weak external governance than firms where external governance is strong,” said Liang. “What’s more, our results support the notion that shareholder participation discourages accounting decisions or practices that could result in misreporting.”
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Tags: Accounting, Financial Reporting
